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Extreme Profits and Losses Contribution Index: A Sensitivity-Based Approach

This paper introduces the Extreme Profits and Losses Contribution Index (EPLC) as a new performance measure adjusted for risk. Utilizing sensitivity analysis, the EPLC facilitates the comparison of assets' contributions to favorable and unfavorable events within a portfolio. By combining this index with portfolio theory, investors can evaluate more volatile portfolios on the Markowitz efficiency frontier. The EPLC aids in recommending the selection or rejection of portfolios based on the efficiency of their volatile assets. Importantly, the EPLC values above 1 indicate assets with higher extreme profits contribution compared to extreme losses, suggesting their inclusion in the portfolio. Conversely, EPLC values below 1 advise against adding such assets. This approach guides investors to consider asset contributions to favorable events relative to unfavorable ones, even in high-volatility scenarios.

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Extreme Profits and Losses Contribution Index: A Sensitivity-Based Approach

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  1. A SENSITIVITY BASED APPROACH FOR DETERMINING THE EXTREME PROFITS AND LOSSES CONTRIBUTION INDEX D. Delgado1, C. M. Rocco S2 1Central Bank of Venezuela; 2Universidad Central de Venezuela This paper proposes a new performance index adjusted for risk, base on sensitivity analysis which allows the comparison of assets contributions to a portfolio’s favorable and unfavorable events. This index, called the Extreme Profits and Losses Contribution Index (EPLC), in combination with portfolio theory allows the evaluation of more volatile portfolios within the Markowitz efficiency frontier, and thus the recommendation of choosing or rejecting portfolios through considering the efficiency of their more volatile assets. . . ImportanceMeasure is applied in both tales = Extreme profits = Extreme Loses EPLC>1, for example 1.40, indicates that that extreme profits explained by asset j is 40% higher than its extreme losses contribution. This value suggests that it is convenient to hold this asset in the portfolio . It has a higher contribution in extreme favorable events in comparison to its unfavorable ones. In a opposite case, EPLC<1 suggests not to add that asset to the portfolio. This result suggests to invest in a portfolio like this one, even thought the stocks have a very high volatility, their contribution to favorable events is greater than their contribution to unfavorable events..

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