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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.

Suggested Citation

  • Enrique Sentana & Enrique Sentana, 2001. "Mean-Variance Portfolio allocation with a Value at Risk Constraint," FMG Discussion Papers dp380, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp380
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    References listed on IDEAS

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    8. MacKinlay, A. Craig, 1995. "Multifactor models do not explain deviations from the CAPM," Journal of Financial Economics, Elsevier, vol. 38(1), pages 3-28, May.
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    15. repec:hrv:faseco:30721347 is not listed on IDEAS
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    Cited by:

    1. Josep Pijoan-Mas, 2006. "Precautionary Savings or Working Longer Hours?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 326-352, April.
    2. Kaplanski, Guy, 2005. "Analytical Portfolio Value-at-Risk," MPRA Paper 80216, University Library of Munich, Germany.
    3. 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 (IfW).

    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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