Risk Management with Benchmarking
38 Pages Posted: 7 Nov 2008
There are 9 versions of this paper
Risk Management with Benchmarking
Risk Management with Benchmarking
Risk Management with Benchmarking
Risk Management with Benchmarking
Risk Management with Benchmarking
Risk Management with Benchmarking
Risk Management with Benchmarking
Risk Management with Benchmarking
Date Written: October 2001
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 prespecified 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 overperforms a target benchmark under different economic conditions, depending on his attitude towards risk and choice of the benchmark. Investors can therefore achieve their desired gain/loss characteristics for funds under management through an appropriate combined choice of the benchmark and money manager.
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