Title: | Risk Management with Benchmarking |
Authors: | Basak, Suleyman Shapiro, Alex Tepla, Lucie |
Keywords: | Benchmarking;Investments;Shortfall Risk;Tracking Errors;Value-at-Risk |
Issue Date: | Dec-2003 |
Series/Report no.: | FIN-03-048 |
Abstract: | Portfolio theory must address the fact that, in reality, portfolio managers are evaluated relative to a benchmark, and therefore adopt risk management practices to account for the benchmark performance. We capture this risk management consideration by allowing a pre-specified shortfall from a target benchmark-linked return, consistent with growing interest in such practice. In a dynamic setting, we demonstrate how a risk averse portfolio manager optimally under- or over-performs a target benchmark under different economic conditions, depending on his attitude towards risk and choice of the benchmark. The analysis therefore illustrates how investors can achieve their desired gain/loss characteristics for funds under management through an appropriate combined choice of the benchmark and money manager. We consider a variety of extensions, and also highlight the ability of our setting to shed some light on documented return patterns across segments of the money management industry. |
URI: | http://hdl.handle.net/2451/27293 |
Appears in Collections: | Finance Working Papers |
Files in This Item:
File | Description | Size | Format | |
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wpa03048.pdf | 819.95 kB | Adobe PDF | View/Open |
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