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Mean-Variance Portfolio allocation with a Value at Risk Constraint

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  • Enrique Sentana
  • Enrique Sentana

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Abstract

In this paper, I first provide a unifying approach to Mean-Variance analysis and Value at Risk, which highlights both 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 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.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp380.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp380.

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Date of creation: May 2001
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Handle: RePEc:fmg:fmgdps:dp380

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Web page: http://www.lse.ac.uk/fmg/

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Cited by:
  1. Josep Pijoan-Mas, 2004. "Precautionary Savings or Working Longer Hours?," 2004 Meeting Papers 350, Society for Economic Dynamics.
  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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