Risk Management with Benchmarking

38 Pages Posted: 13 Nov 2008

See all articles by Suleyman Basak

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

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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.

Suggested Citation

Basak, Suleyman, Risk Management with Benchmarking (October 2001). NYU Working Paper No. S-AM-01-01, Available at SSRN: https://ssrn.com/abstract=1300799

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

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