Symmetric vs. Downside Risk Measures in Portfolio Decisions

Downside risk measures are more intuitive but mathematically more complex to use, comparing to the more classical concept of variance. The relevant literature has grown rapidly in the recent years which this paper maps in the context of portfolio selection theory. Although the concept of risk is at the core of finance theory in general, empirical evidence supporting comparative advantage of employing symmetric vs. downside risk measures in portfolio decisions is surprisingly dispersed. We find that the literature has largely ignored behavioral aspects of using complex but realistic models. Namely, that the investors make decisions using complex models without fully understanding the model itself.