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To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ejor.2007.08.035 Byline: Simone Farinelli (a), Manuel Ferreira (b), Damiano Rossello (c), Markus Thoeny (b), Luisa Tibiletti (d) Keywords: Risk management; Decision support system; Asset allocation Abstract: Optimal asset allocation well-fitting investors' goals is a pressing challenge in risk management. Making a step forward to the Sharpe ratio, the parameter-dependent Sortino-Satchell, Generalized Rachev and Farinelli-Tibiletti performance ratios are suggested for personalizing asset allocation. Tailor-made optimal asset paths for five different investor risk profiles are traced over a rolling 12 month investing horizon. Our simulations show a satisfactorily good match between asset allocation and correspondent risk profile. Specifically, Generalized Rachev ratios outperform in personalized allocation for 'extreme' risk profiles, i.e. conservative and aggressive investors, whereas Sortino-Satchell and Farinelli-Tibiletti ratios for those that are more moderate. Sharpe ratio confirms its ability in constructing steady-diversified portfolios, although underperformed. Author Affiliation: (a) Credit and Country Risk Control, UBS, CH-8098 Zurich, Switzerland (b) Investment and Quantitative Research, Cantonal Bank of Zurich, CH-8010 Zurich, Switzerland (c) Department of Economics and Quantitative Methods, University of Catania, Corso Italia 55, 95129 Catania, Italy (d) Department of Statistics and Mathematics, University of Torino, Piazza Arbarello 8, I-10122 Torino, Italy Article History: Received 2 December 2006; Accepted 31 August 2007

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ejor.2006.08.020 Byline: Simone Farinelli (a), Luisa Tibiletti (b) Keywords: Risk management; Sharpe index; One-sided risk measures Abstract: If we exclude the assumption of normality in return distributions, the classical risk-reward Sharpe Ratio becomes a questionable tool for ranking risky projects. In line with Sharpe thinking, a general risk-reward ratio suitable to compare skewed returns with respect to a benchmark is introduced. The index includes asymmetrical information on: (1) 'good' volatility (above the benchmark) and 'bad' volatility (below the benchmark), and (2) asymmetrical preference to bet on potential high stakes and the aversion against possible huge losses. The former goal is achieved by using one-sided volatility measures and the latter by choosing the appropriate order for the one-sided moments involved. The Omega Index (see [Cascon A., Keating, C., Shadwick, W., 2002. Introduction to Omega, The Finance Development Centre]) and the Upside Potential Ratio (see [Sortino, F., Van Der Meer, R., Plantinga, A., 1999. The Dutch triangle. Journal of Portfolio Management, 26 (I, Fall), 50-58]) follow as special cases. Author Affiliation: (a) Quantitative and Bond Research, Cantonal Bank of Zurich, P.O. Box, CH-8010 Zurich, Switzerland (b) Department of Statistics and Mathematics 'Diego de Castro', University of Torino, Piazza Arbarello, 8, I-10122 Torino, Italy

A model using the Bayesian decision process was developed to generate better forecasting results. The basic Bayesian approach assumes that decisions are made from a normal distribution of the unknown quantity, which are not affected by forecast errors. The new approach is a result of the modified Bayesian model, which accomodates the possibility of expert errors. This resulted to the generation of a uniform, quasi-linear average formula.