The Use of Drawdown Beta in Decision-Making for Optimal Portfolio Formation by Managers on the Tehran Stock Exchange

Subject Areas :

REZA HADDADZADEH ¹ , ezatollah abbasian ²

1 -
2 - Associate Professor in Economics, Department of Public Administration, Faculty of Management, University of Tehran,

Received: 2024-09-11 Accepted : 2024-09-24 Published : 2024-10-27

Keywords: Expected Regret of Draw down, Conditional Drawdown-at-Risk, Capital Asset Pricing Model, Standard Beta, Negative ERod, Downside Beta,

Abstract :

In this article, a new and dynamic metric called Expected Regret of Drawdown (ERoD) is employed to enhance the decision-making quality of managers in forming an optimal portfolio by calculating portfolio risk. This metric essentially represents the average of capital drawdowns that exceed a specific threshold (e.g., 20%). The Expected Regret of Drawdown is somewhat similar to Conditional Drawdown at Risk (CDaR), which is defined as the average of a certain percentage of the largest drawdowns. However, Expected Regret of Drawdown Beta has advantages over CDaR Beta. A negative ERoD Beta identifies securities that generate positive returns during periods when the market experiences drawdowns beyond the threshold. Therefore, ERoD Beta only considers those time periods when the market is in a drawdown state. Conceptually, this differs from standard Beta, which does not distinguish between upward and downward market movements.

In this article, the Conditional Drawdown at Risk (CDaR) Beta and the Expected Regret of Drawdown (ERoD) Beta for 30 stocks listed on the Tehran Stock Exchange were compared with the standard Beta. It was found that, in addition to being stable over time, during periods when the Tehran Stock Exchange index experiences declines and capital drawdowns, these betas offer a better measure for calculating risk and forming optimal portfolios compared to the standard Beta. This provides investment managers with a more reliable tool for making higher-quality decisions when constructing optimal portfolios.

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