Conditional Value-at-Risk targeted portfolio optimisation

Sammanfattning: New financial regulations have constantly forced market participants to adapt to changing rules. Recent regulatory iterations require them to focus on tail risk in portfolios of financial assets. One metric to quantify tail risk in portfolios is the Conditional Value-at-Risk (cVaR). While academic research has recently enhanced the importance of constructing optimal portfolios from a risk management perspective these results have not been incorporated into business models of firms in the asset management industry. Therefore, this thesis focuses on the practical aspect of implementing a process to optimise portfolios from a risk perspective. It gives step by step instructions to the optimal risk controlling construction of a portfolio from different asset universes including equity, bonds and commodity indices. Backtest results show that risk focussing strategies deliver superior risk-adjusted returns compared to traditional strategies like buy and hold and equal-weight. In particular, the cVaR Deviation and Minimum Variance portfolios achieve the highest Sharpe Ratio. Additionally, a replication consisting of exchange traded funds validates the importance of the results as it shows that retail investors are able to follow the developed investment approaches.