Risk Management with Benchmarking

41 Pages Posted: 11 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

INSEAD

Multiple version iconThere are 9 versions of this paper

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

Suggested Citation

Basak, Suleyman and Shapiro, Alex and Tepla, Lucie, Risk Management with Benchmarking (December 2003). NYU Working Paper No. FIN-03-048. Available at SSRN: https://ssrn.com/abstract=1299508

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)

London
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
France
+33 16 072 4485 (Phone)
+33 16 072 4045 (Fax)

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