Risk-Constrained Dynamic Active Portfolio Management

Sid Browne ()
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Sid Browne: Goldman, Sachs and Company, Firmwide Risk Management, 10 Hanover Square, New York, New York 10005, and Graduate School of Business, Columbia University, New York, New York 10027

Management Science, 2000, vol. 46, issue 9, 1188-1199

Abstract: Active portfolio management is concerned with objectives related to the outperformance of the return of a target benchmark portfolio. In this paper, we consider a dynamic active portfolio management problem where the objective is related to the tradeoff between the achievement of performance goals and the risk of a shortfall. Specifically, we consider an objective that relates the probability of achieving a given performance objective to the time it takes to achieve the objective. This allows a new direct quantitative analysis of the risk/return tradeoff, with risk defined directly in terms of probability of shortfall relative to the benchmark, and return defined in terms of the expected time to reach investment goals relative to the benchmark. The resulting optimal policy is a state-dependent policy that provides new insights. As a special case, our analysis includes the case where the investor wants to minimize the expected time until a given performance goal is reached subject to a constraint on the shortfall probability.

Keywords: portfolio theory; benchmarking; active portfolio management; stochastic control (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (34)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:46:y:2000:i:9:p:1188-1199

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