Mean-Variance Portfolio Allocation with a Value at Risk Constraint

CEMFI Working Paper No. 0105

19 Pages Posted: 23 Jun 2001

See all articles by Enrique Sentana

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI); Financial Markets Group; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2001

Abstract

In this paper, I first provide a unifying approach to Mean-Variance analysis and Value at Risk, which highlights their similarities and differences. Then I use it to explain how fund managers can take investment decisions within the well-known Mean-Variance allocation framework that satisfy the VaR restrictions imposed on them by regulators. I do so by introducing a new type of line to the usual mean - standard deviation diagram, called IsoVaR, which represents all the portfolios that share the same VaR for a fixed probability level. Finally, I analyse the "shadow cost" of a VaR constraint.

Keywords: Risk management, Portfolio frontier, Market risk capital

JEL Classification: G11

Suggested Citation

Sentana, Enrique, Mean-Variance Portfolio Allocation with a Value at Risk Constraint (June 2001). CEMFI Working Paper No. 0105. Available at SSRN: https://ssrn.com/abstract=272730 or http://dx.doi.org/10.2139/ssrn.272730

Enrique Sentana (Contact Author)

Centro de Estudios Monetarios y Financieros (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~sentana/

Financial Markets Group

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Centre for Economic Policy Research (CEPR)

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United Kingdom

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