Portfolio Frontiers with Restrictions to Tracking Error Volatility and Value at Risk
AbstractAsset managers are often given the task of restricting their activity by keeping both the value at risk (VaR) and the tracking error volatility (TEV) under control. However, these constraints can not always be simultaneously satisfied because the VaR is independent of the benchmark portfolio. The management of these restrictions is likely to affect portfolio performances and produces a wide variety of scenarios in the risk-return space. The aim of this paper is to analyse various interactions between portfolio frontiers when restrictions upon TEV and VaR are jointly imposed. Analytical solutions for the intersections are provided and short numerical methods are proposed when solutions are not available. Finally, a new portfolio frontier is introduced.
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Bibliographic InfoPaper provided by Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali in its series Working Papers with number 358.
Date of creation: Jun 2011
Date of revision:
asset allocation; portfolio frontiers; tracking error volatility; value at risk;
Other versions of this item:
- Palomba, Giulio & Riccetti, Luca, 2012. "Portfolio frontiers with restrictions to tracking error volatility and value at risk," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2604-2615.
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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