Abstracts for Vol.
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The traditional Markowitz portfolio optimization has two serious drawbacks. First, mean-variance portfolio optimization is inadequate when asset returns are skewed. Second, investor risk aversion is ignored. The concepts of LPM and co-LPM, a downside measure of the covariance of return, are extended to Markovitz's model to provide a more efficient and robust optimization process. This article demonstrates that downside risk models can be easily implemented using spreadsheet programs and illustrates how investor risk aversion can be incorporated into a donwside risk asset optimization model.