Portfolio Return Relative to a Benchmark

Aleksandr Alekseev and Mikhail Sokolov

No 2016/04, EUSP Department of Economics Working Paper Series from European University at St. Petersburg, Department of Economics

Abstract: 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.

Keywords: portfolio performance; compound annual growth rate; benchmarking; index number theory; portfolio choice under uncertainty (search for similar items in EconPapers)
JEL-codes: C43 G11 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2016-07-05
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