Portfolio Risk Management Using
the Lorenz Curve

Abstract

This article presents a methodology for using the Lorenz curve in financial economics. Most of the recent quantitative risk measures that abide by the rules of second-degree stochastic dominance, such as Gini’s mean difference and conditional value at risk, are associated with the Lorenz curve. With financial data, the Lorenz curve is easy to calculate, because it requires sorting asset returns in ascending order. A financial analyst can derive the statistics necessary to carry out a study of risk analysis and establish a set of efficient and most-preferred portfolios for all risk-averse investors.

TOPICS: Portfolio theory, VAR and use of alternative risk measures of trading risk, statistical methods