Portfolio Construction and Tail Risk

In the wake of the financial crisis, investors are increasingly concerned with ways to mitigate extreme losses. The authors analyze various approaches to enhancing traditional portfolio construction with tail-risk control. They find investors have better managed tail risk using a minimum-volatility overlay strategy than by explicitly penalizing extreme losses via conditional value at risk (CVaR). Various minimum-volatility products are readily available on the market, suggesting a cheap and easy solution for tail-risk control. TOPICS:Tail risks, portfolio construction