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Minimizing Shortfall
Abstract
Despite the increasing sophistication of Finance in the past 30 years, quantitative tools for building portfolios remain entrenched in the paradigm proposed by Markowitz in 1952; these tools offer investors a trade-off between mean return and variance. However, Markowitz himself was not satisfied with variance, which penalizes gains and losses equally. Instead he preferred semi-deviation, which only penalizes losses.