A unified approach to portfolio selection in a tracking error framework with additional constraints on risk

Patrizia Stucchi

The Quarterly Review of Economics and Finance, 2015, vol. 56, issue C, 165-174

Abstract: Most methods of performance evaluation and most allocation strategies are based on tracking error, that is the excess return of the managed portfolio with respect to the benchmark return. Analysis of the tracking error in a mean-variance framework has been performed by Roll (1992) who also investigated the impact of additional beta constraints, while Jorion (2003) considers constraints on total risk (portfolio variance). Alexander and Baptista (2010) add a constraint on the alpha of minimum tracking error variance portfolios. In other recent works, Alexander and Baptista (2008) and Palomba and Riccetti (2012) analyze the problem with Value at Risk (VaR) constraints under return normality assumption. This paper investigates the relationships between all these different approaches and provides a unified treatment. Moreover, analysis of the frontier of Conditional VaR constrained tracking error variance has been performed.

Keywords: Portfolio frontiers; Tracking error; Risk management; Value at Risk (VaR); Conditional VaR (CVaR) (search for similar items in EconPapers)
JEL-codes: C61 D81 G11 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:56:y:2015:i:c:p:165-174

DOI: 10.1016/j.qref.2014.09.008

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