Portfolio Selection Model based on Drawdown Risk Measure with Different Inputs

In addition to assets selection based on expected returns and financial indicators, the Investor in the decision-making process on investment strategy faces the question of how to implement portfolio diversification. Portfolio theory deals with this issue, with aims to find a mix of assets with the optimization models of expected return and risk criteria. Generally, these models result in a set of effective portfolios, from which the decision maker, based on additional information, selects the best alternative. The paper deals with the model in which the risk of Drawdown is used. The starting point is known model from the literature with assumptions of known cumulative yield values and the maximum possible loss of capital for the constructed portfolio. This means that the decision maker implements a portfolio based on the yield maximization criterion, with a known maximum possible loss of capital. However, the required minimum yield value may also be known in practice. Based on this idea, a modification of the model is constructed in which, unlike the original model, the input that represents the value of the minimum yield is altered and the aim is to minimize the risk.