Evaluating Markowitz-based risk measurement approaches for making profitable investment decisions

Abstract

Risk is one of the most important factors in making desired profitable investment decisions. It is the main reason that why numerous financial researchers have interested in risk assessment, from the past to the present. The literature of risk measurement approaches for financial decision making has dramatically expanded since the early work of Markowitz. Konno, Cai and Teo risk assessment approaches are the most well-known and widely-used methods, developed based on the basic concepts of the Markowitz model. Although, all of these approaches have unlike advantages for measuring the risk and making profitable investment decisions, none of them are not universal method, which can be applied in all circumstances with desired performance. On the other hand, each of these methods may yield higher or lower performance rates than other those methods in various situations and different data sets. In this regard, and due to the lack of suitable research in order to compare risk measurement methods, the aim of this paper is to evaluate four aforementioned Markowitz-based risk measurement methods in different investment decision making situations. Empirical results of using these methods in stock market indicate that Markowitz, Konno, Cai and Teo techniques can achieve, %-6.77, %-6.49, %2.85 and %-6.89 rate of return, respectively. Therefore, the Cai technique may be more appropriate risk measurement approach among aforementioned methods for making investment decisions in stock markets.