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Mean-Variance Portfolio allocation with a Value at Risk Constraint

  • Enrique Sentana
  • Enrique Sentana


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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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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