Journal
EUROPEAN JOURNAL OF OPERATIONAL RESEARCH
Volume 234, Issue 2, Pages 469-480Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.ejor.2013.06.023
Keywords
Mean-variance; Fraud detection; Optimal portfolio; Correlation constraints
Funding
- Natural Sciences and Engineering Research Council of Canada
- Society of Actuaries Centers of Actuarial Excellence Research Grant
- BNP Paribas Fortis Chair in Banking
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We first study mean-variance efficient portfolios when there are no trading constraints and show that optimal strategies perform poorly in bear markets. We then assume that investors use a stochastic benchmark (linked to the market) as a reference portfolio. We derive mean-variance efficient portfolios when investors aim to achieve a given correlation (or a given dependence structure) with this benchmark. We also provide upper bounds on Sharpe ratios and show how these bounds can be useful for fraud detection. For example, it is shown that under some conditions it is not possible for investment funds to display a negative correlation with the financial market and to have a positive Sharpe ratio. All the results are illustrated in a Black-Scholes market. (C) 2013 Elsevier B.V. All rights reserved.
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