Portfolio selection in an expected shortfall framework during the recent ‘credit crunch’ period

Portfolio selection models using variance, Value-at-Risk (VaR) and expected shortfall measures of risk are analysed, assuming differing underlying return distributions. The expected shortfall approach provides advantages relative to the VaR approach in terms of lower portfolio downside risks. Furthermore, using the extreme value distribution provides more insights for the investor relative to the empirical distribution. Analysing portfolio selection using these differing risk measures around the recent sub-prime mortgage problem period provides topical insights into the asset allocation process for the investor.