Risk Management with Benchmarking

38 Pages Posted: 3 Nov 2008

See all articles by Suleyman Basak

Suleyman Basak

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

Alex Shapiro

New York University (NYU) - Department of Finance

Lucie Tepla


Multiple version iconThere are 9 versions of this paper

Date Written: October 2001


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 and Shapiro, Alex and Tepla, Lucie, Risk Management with Benchmarking (October 2001). NYU Working Paper No. FIN-01-015. Available at SSRN: https://ssrn.com/abstract=1294470

Suleyman Basak (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
44 (0)20 7000 8201 (Fax)

HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

United Kingdom

Alex Shapiro

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0362 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~ashapiro/

Lucie Tepla

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 16 072 4485 (Phone)
+33 16 072 4045 (Fax)

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