Brief summary of common loan problems
Our study demonstrates that the increase of high-yield volatility effected by the desmoothing of the monthly return series moves the asset classes and the efficient frontier in a risk/return chart to the right. Evidence shows that consequently the composition and the risk-return profile of the optimal portfolios also change. While the weight of high yield reduces by 2–13 percentage points, mortgage-backed securities and investment grade corporate bonds become more important in a portfolio context. In the ERPs diversified corporate bond sub-portfolios receive a weighting of about 75 percent. Except for the portfolio based on the mean–variance framework, investment grade corporate bonds are also part of the TP. Investors looping for a particularly attractive risk/return profile or willing to maximize their return for a given level of risk, seriously should consider corporate bonds as an alternative. Even for investors who are averse to negative skewness and leptokurtosis – as modeled by the Corning–Fisher approach – the admixture of a small high-yield portfolio can improve the risk/reward profile of their fixed income portfolio.
Again, the risk/return characteristics of the optimized portfolios are summarized in our study. We noted before that in comparison to a pure government portfolio the presented portfolios offer a more attractive investment opportunity. This observation is supported by the results of the stochastic dominance algorithm. As in the case without adjustment for serial correlation the government portfolio is dominated by all optimized portfolios. The results of the stochastic dominance algorithm also indicate that after the desmoothing process only one portfolio is excluded from the second-order stochastic dominance set: the minimum risk portfolio based on the Corning–Fisher approach.
