Risk Constrained Dynamic Active Portfolio Management

20 Pages Posted: 29 Jun 2000

Date Written: October 1999

Abstract

Active portfolio management is concerned with objectives related to the outperformance of the return of a target benchmark portfolio. In this paper, we consider a dynamic active portfolio management problem where the objective is related to the tradeoff between the achievement of performance goals and the risk of a shortfall. Specifically, we consider an objective that relates the probability of achieving a given performance objective to the time it takes to achieve the objective. This allows a new direct quantitative analysis of the risk/return tradeoff, with risk defined directly in terms of probability of shortfall relative to the benchmark and return defined in terms of the expected time to reach investment goals relative to the benchmark. The resulting optimal policy is a state dependent policy that provides new insights. As a special case, our analysis includes the case where the investor wants to minimize the expected time until a given performance goal is reached subject to a constraint on the shortfall probability.

JEL Classification: C73, G11

Suggested Citation

Browne, Sid, Risk Constrained Dynamic Active Portfolio Management (October 1999). Available at SSRN: https://ssrn.com/abstract=209240 or http://dx.doi.org/10.2139/ssrn.209240

Sid Browne (Contact Author)

Columbia Business School ( email )

3022 Broadway
402 Uris Hall
New York, NY 10027
United States
212-854-8173 (Phone)
212-316-9180 (Fax)

HOME PAGE: http://www.gsb.columbia.edu/divisions/dro/browne.html

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