Mean-Variance Optimal Portfolios in the Presence of a Benchmark with Applications to Fraud Detection
Forthcoming in European Journal of Operational Research
27 Pages Posted: 30 Sep 2012 Last revised: 23 Jun 2013
Date Written: June 23, 2013
We first study mean-variance efficient portfolios when there are no trading constraints and show that optimal strategies perform poorly in bear markets. We then assume investors use a stochastic benchmark (linked to the market) as a reference portfolio. We derive mean-variance efficient portfolios when investors aim to achieve a given correlation (or a given dependence structure) with a stochastic benchmark. We also provide upper bounds on Sharpe ratios and show how these can be useful for fraud detection. For example it is shown that under some conditions it is not possible for investment funds to display negative correlation with the financial market and to have a positive Sharpe ratio. All results are illustrated in a Black-Scholes market.
Keywords: Mean-variance, Fraud detection, Optimal portfolio, Correlation constraints
JEL Classification: G11, D81
Suggested Citation: Suggested Citation