PORTFOLIO SELECTION IN DOWNSIDE RISK OPTIMIZATION APPROACH - APPLICATION TO THE HONG-KONG STOCK-MARKET

In this paper, we consider the portfolio selection problem. For 60 sel ected Hong Kong stocks, we form portfolios based on 10 years of observ ations. The classical Markowitz mean-variance model is compared with a downside risk optimization model for the Hong Kong stock market. In p articular, the downside risk model provided better downside risk prote ction in the sense of offering lower risk and higher return for the ch osen data. The results also indicate that longer holding periods tend to result in higher portfolio returns. Lastly, the downside risk optim ization approach allows investors to specify both required return leve ls and target return rates in order to reflect their risk attitudes.