"Islamic Finance Researches" (IFR)

Modified Standard Risk Assessment Based on Optimal Capacity Investment Decisions and Portfolio Optimization (Infrastructure Speculation and New Financial Instrument)

Document Type : Paper

Authors

1 Professor, Department of Finance and Accounting, Islamic Azad University, Science and Research Branch

2 PhD student in Financial Management, Islamic Azad University, Science and Research Branch

Abstract

In order to use an Islamic financial instrument, this paper intends to measure and evaluate negative and positive deviations from target rate of return in investment opportunity evaluation,that leads to presenting an upside potential- adjusted risk measure. This risk measure named Upside Potential Adjusted Risk Measure (ALPM) is generally applicable and provides assumptions of Variance, Downside Risk, LPM and UPM leading to the same results. It adjusts the downside risk of an investment opportunity by using the investors’s personal viewpoints and incorporates the probability and the size of upside potential in risk measurement. ALPM, which is applicable in individual security risk measurement and portfolio optimization, calculates risk by downside risk and upside potential.
ALPM can solve important paradoxes of decision making, namely the Allais, the Ellsberg and the St. Petersburg Paradox, and is applicable in portfolio optimization in order to maximize the expected rate of return and minimize the upside potential adjusted risk.

Keywords

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Volume 2, Issue 2 - Serial Number 4
May 2013
Pages 87-122
  • Receive Date: 15 September 2015
  • Accept Date: 15 September 2015