Risk Management with Benchmarking
41 Pages Posted: 11 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: December 2003
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.
Keywords: Benchmarking, Investments, Shortfall Risk, Tracking Errors, Value-at-Risk
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