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Portfolio Performance Evaluation Using Value at Risk

Posted: 16 Oct 2006  

Gordon J. Alexander

University of Minnesota - Twin Cities - Carlson School of Management

Alexandre M. Baptista

George Washington University - School of Business

Abstract

Developed here is a value at risk-based measure of portfolio performance called the reward-to-VaR ratio. It is demonstrated that, under normality, the reward-to-VaR ratio gives the same ranking for portfolio performance as the frequently used Sharpe ratio. Under non-normality, the reward-to-VaR ratio at one confidence level may give a ranking for portfolio performance different from the ranking obtained at a different confidence level. This indicates that the risk-taking incentives of a portfolio manager in a VaR-based risk management system can be substantially different from the incentives in a Sharpe ratio-based system.

Keywords: Value-at-risk (VaR), portfolio performance

JEL Classification: G11

Suggested Citation

Alexander, Gordon J. and Baptista, Alexandre M., Portfolio Performance Evaluation Using Value at Risk. Journal of Portfolio Management, Vol. 29, pp. 93-102, Summer 2003 . Available at SSRN: https://ssrn.com/abstract=937831

Gordon Alexander (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-8598 (Phone)
612-624-1335 (Fax)

Alexandre Baptista

George Washington University - School of Business ( email )

School of Business, Funger Hall, Suite 501
2201 G Street, NW
Washington, DC 20052
United States
202-994-3309 (Phone)
202-994-5014 (Fax)

HOME PAGE: http://home.gwu.edu/~alexbapt/

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