The Application of Aumann-Serrano Index of Riskiness in Portfolio Optimization: A Case Study of Tehran Stock Exchange

In a risky situation probabilities of states are available.Until recently, normal distribution has been used widely in financial applications for a risky situation. Recent studies have shown that normal distribution is not appropriate for financial data and that simple variance of data as an index of riskiness is a misleading indicator of riskiness. Aumann-Serrano (2008) introduce a new economic index of riskiness to overcome these problems. In this research we use Aumann-Serrano Index to build an optimal portfolio for 23 major stocks in Tehran Stock Exchange. We compare our results with equally weighted portfolio and sharpe-ratio based portfolio and find that economic index of riskiness outperforms others with a 50.6 percent return.