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Mean Variance Portfolio Allocation with a Value at Risk Constraint

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  • Sentana, Enrique

Abstract

In this Paper, I first provide a simple unifying approach to static 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 that satisfy the VaR restrictions imposed on them by regulators, within the well-known Mean-Variance allocation framework. 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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2997.

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Date of creation: Oct 2001
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Handle: RePEc:cpr:ceprdp:2997

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Keywords: market risk capital; portfolio frontier; risk management;

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Cited by:
  1. Josep Pijoan-Mas, 2003. "Precautionary Savings Or Working Longer Hours?," Working Papers wp2003_0311, CEMFI.
  2. Grau-Carles, Pilar & Sainz, Jorge & Otamendi, Javier & Doncel, Luis Miguel, 2009. "Different risk-adjusted fund performance measures: a comparison," Economics Discussion Papers 2009-54, Kiel Institute for the World Economy.

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