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Skew-Risk Portfolio Theory

This article is the “Prequal” to Sherwood’s Targeted Return Portfolio Construction (TRPC) (2019) and Risk Capacity Portfolio Construction (RCPC) (2021) papers. This work presents the theoretical constructs in which Skew-Risk Modeling (Sherwood, 2019), the strategy applications within TRPC and RCPC, is based on. In fact, the models introduced in the TRPC and RCPC validate, and prove, Skew-Risk Portfolio Theory (SRPT) as theory. As detailed herein, SRPT is an innovative framework with application to any investment strategy. This paper discusses the difference between SRPT and traditional portfolio theories, as well as SRPT’s ability to utilize financial and non-financial performance (ESG) factors.