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Portfolio Return Relative to a Benchmark

Author

Listed:
  • Alexander Alekseev
  • Mikhail Sokolov

Abstract

Benchmarking is a universal practice in portfolio management and is well-studied in the optimal portfolio selection literature. This paper derives axiomatic foundations for a benchmark-based evaluation, which is generally grounded on the relative return. We show that the existence of a benchmark naturally arises from a few basic axioms and is tightly linked to the economic theory. Our method relies on the use of both axiomatic and economic approaches to index number theory. We also analyze the problem of optimal portfolio selection under complete uncertainty about a future price system, where the objective function is the relative return.

Suggested Citation

  • Alexander Alekseev & Mikhail Sokolov, 2016. "Portfolio Return Relative to a Benchmark," EUSP Department of Economics Working Paper Series Ec-04/16, European University at St. Petersburg, Department of Economics.
  • Handle: RePEc:eus:wpaper:ec0416
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    References listed on IDEAS

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    More about this item

    Keywords

    portfolio performance; compound annual growth rate; benchmarking; index number theory; portfolio choice under uncertainty;

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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