Portfolio selection using the Riskiness Index

Purpose: The purpose of this paper is to increase the accuracy of the efficient portfolios frontier and the capital market line using the Riskiness Index. Design/methodology/approach: This paper will develop the mean-riskiness model for portfolio selection using the Riskiness Index. Findings: This paper’s main result is establishing a mean-riskiness efficient set of portfolios. In addition, the paper presents two applications for the mean-riskiness portfolio management method: one that is based on the multi-normal distribution (which is identical to the MV model optimal portfolio) and one that is based on the multi-normal inverse Gaussian distribution (which increases the portfolio’s accuracy, as it includes the a-symmetry and tail-heaviness features in addition to the scale and diversification features of the MV model). Research limitations/implications: The Riskiness Index is not a coherent measurement of financial risk, and the mean-riskiness model application is based on a high-order approximation to the portfolio’s rate of return distribution. Originality/value: The mean-riskiness model increases portfolio management accuracy using the Riskiness Index. As the approximation order increases, the portfolio’s accuracy increases as well. This result can lead to a more efficient asset allocation in the capital markets.