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Bridge over ocean
1 March 2011 Financial Analysts Journal Volume 67, Issue 2

The Impact of Skewness and Fat Tails on the Asset Allocation Decision

  1. James X. Xiong, CFA
  2. Thomas M. Idzorek, CFA

The authors modeled the non-normal returns of multiple asset classes by using a
multivariate truncated Lévy flight distribution and incorporating
non-normal returns into the mean-conditional value at risk (M-CVaR) optimization
framework. In a series of controlled optimizations, they found that both
skewness and kurtosis affect the M-CVaR optimization and lead to substantially
different allocations than do the traditional mean–variance
optimizations. They also found that the M-CVaR optimization would have been
beneficial during the 2008 financial crisis.

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