Risk Management with Benchmarking

29 Pages Posted: 3 Mar 2002

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


Multiple version iconThere are 9 versions of this paper

Date Written: September 2005


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 prespecified 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 overperforms 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 performance profile 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 Error, Value-at-Risk

JEL Classification: G11, G23, D81

Suggested Citation

Basak, Suleyman and Shapiro, Alex and Tepla, Lucie, Risk Management with Benchmarking (September 2005). AFA 2003 Washington, DC Meetings; NYU Finance Working Paper; EFA 2002 Berlin; LBS Working Paper, Available at SSRN: https://ssrn.com/abstract=302101 or http://dx.doi.org/10.2139/ssrn.302101

Suleyman Basak (Contact Author)

London Business School ( email )

Sussex Place
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London, London NW1 4SA
United Kingdom
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HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

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

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