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Portfolio Return Relative to a Benchmark

Listed author(s):
  • Alexander Alekseev
  • Mikhail Sokolov

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.

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Paper provided by European University at St. Petersburg, Department of Economics in its series EUSP Department of Economics Working Paper Series with number Ec-04/16.

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Length: 37 pages
Date of creation: 05 Jul 2016
Handle: RePEc:eus:wpaper:ec0416
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  1. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
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