The importance of considering higher order moments in portfolio optimization
Auteur 1 : Lahbous Adam,
Auteur 2 : Zammar Rachid,
Mean-variance, portfolio optimization, non-normality of returns, Higher Order Moments.
This research paper discusses the importance of incorporating higher order moments in optimizing a stock portfolio when the returns of those stocks don’t follow a Gaussian law. In this context, our research work illustrates, through an empirical study on a sample of 20 stocks listed on the Casablanca Stock Exchange, how to optimize a portfolio when returns are not normally distributed, especially in an emerging financial market like that of Morocco. where stock returns have thick distribution tails.
The study demonstrated that portfolio optimization by integrating higher order moments is a multi-objective optimization whose outcome depends on investor preferences. The study also demonstrated that the use of “mean-variance” optimization, when returns are not distributed normally, can direct investors to a higher level of return than what is in reality.
Vol. 3 No 8 (2021)