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Abstract
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
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