COMPARISON OF DOWN-SIDE RISK MEASUREMENTS AND MODERN PORTFOLIO THEORY: THE EXAMPLE OF BORSA ISTANBUL

Abstract

The concept of risk entered the portfolio world with the work of Harry Markowitz. By considering risk and return together, Markowitz accepts the return distribution symmetrically to create optimal portfolios so that investors can obtain the least risk (variance) and the highest return. When the return distribution is symmetrical, variance can give accurate results as an indicator of risk. But what if the returns show an asymmetrical distribution, can this be the case? Based on this question, the purpose of our research is to compare the portfolio return, risk and covariances of 10 different stocks traded in BIST100 between 1.1.2011-31.4.2021 according to Modern Portfolio theory and Downside risk criteria. In our study, it has been found that Modern Portfolio does not diversify sufficiently, creates portfolios from stocks with high return-risk features, and when the returns do not show a symmetrical distribution, it is insufficient. On the contrary, it has been understood that portfolios created against downside risk measures contain less risk and that more accurate results can be achieved with downside risk measures in asymmetric return distribution.