f-Betas and Portfolio Optimization with f-Divergence induced Risk Measures

02/01/2023
by   Rui Ding, et al.
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In this paper, we build on using the class of f-divergence induced coherent risk measures for portfolio optimization and derive its necessary optimality conditions formulated in CAPM format. We have derived a new f-Beta similar to the Standard Betas and previous works in Drawdown Betas. The f-Beta evaluates portfolio performance under an optimally perturbed market probability measure and this family of Beta metrics gives various degrees of flexibility and interpretability. We conducted numerical experiments using DOW 30 stocks against a chosen market portfolio as the optimal portfolio to demonstrate the new perspectives provided by Hellinger-Beta as compared with Standard Beta and Drawdown Betas, based on choosing square Hellinger distance to be the particular choice of f-divergence function in the general f-divergence induced risk measures and f-Betas. We calculated Hellinger-Beta metrics based on deviation measures and further extended this approach to calculate Hellinger-Betas based on drawdown measures, resulting in another new metric which we termed Hellinger-Drawdown Beta. We compared the resulting Hellinger-Beta values under various choices of the risk aversion parameter to study their sensitivity to increasing stress levels.

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