Correspondence: Michael Theobald, Accounting and Finance Subject Group, Birmingham Business School, University of Birmingham, Edgbaston, Birmingham B15 2TT, UK. Tel: +44 121 414 6540; E-mail: M.F.Theobald@bham.ac.uk

¹is Senior Economist, Department of Foreign Exchange, The Central Bank of the Republic of China (Taiwan). She carries out research on strategic asset allocation, fixed-income investment and currency overlay strategies. She also watches market risk of portfolios. Before joining the Bank, she was Assistant Professor at YZU University, Taiwan. She has a number of papers published in academic journals, such as Financial Management, Journal of Derivatives, Pacific Basin Finance Journal and Review of Pacific Basin Financial Markets and Policies. She received an FRM (2003) from GARP and a PhD in Finance (1999) from University of Birmingham, UK.

²holds a doctorate from MIT and has lectured on courses in the quantitative and risk areas at Birmingham Business School for a number of years. He has wide consulting/teaching experience and has published in the Journal of Derivatives, Journal of Futures Markets and Japanese Financial Engineering.

³is Chair of the International Examinations Committee of the ACIIA and Professor of Finance and Investment at the Birmingham Business School. He has served as Chairman, Director and Trustee to a variety of organisations and institutions and worked for Price Waterhouse in London and Buenos Aires. He has extensive consultancy experience and has published in specialist and practitioner journals such as the Journal of Portfolio Management, Journal of Derivatives and Journal of Futures Markets as well as in academic journals such as the Journal of Finance, Journal of Financial Economics and Journal of Financial and Quantitative Analysis.

Received 14 November 2007; Revised 14 November 2007.

Abstract

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.