Mean-Variance Portfolio Allocation with a Value at Risk Constraint

Sentana, Enrique

doi:10.2139/ssrn.272730

Download This Paper

Open PDF in Browser

Add Paper to My Library

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)

There 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: 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