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The Journal of Portfolio Management

The Journal of Portfolio Management

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Primary Article

Portfolio Performance Evaluation Using Value at Risk

Gordon J. Alexander and Alexandre M. Baptista
The Journal of Portfolio Management Summer 2003, 29 (4) 93-102; DOI: https://doi.org/10.3905/jpm.2003.319898
Gordon J. Alexander
Holds the John Spooner chair in investment management at the Carlson School of Management at the University of Minnesota in Minneapolis (MN 55455).
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  • For correspondence: galexander@csom.umn.edu
Alexandre M. Baptista
An assistant professor of finance in the Eller College of Business and Public Administration at the University of Arizona in Tucson (AZ 85721).
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Abstract

Developed here is a value at risk-based measure of portfolio performance called the reward-to-VaR ratio. It is demonstrated that, under normality, the reward-to-VaR ratio gives the same ranking for portfolio performance as the frequently used Sharpe ratio. Under non-normality, the reward-to-VaR ratio at one confidence level may give a ranking for portfolio performance different from the ranking obtained at a different confidence level. This indicates that the risk-taking incentives of a portfolio manager in a VaR-based risk management system can be substantially different from the incentives in a Sharpe ratio-based system.

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The Journal of Portfolio Management
Vol. 29, Issue 4
Summer 2003
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Portfolio Performance Evaluation Using Value at Risk
Gordon J. Alexander, Alexandre M. Baptista
The Journal of Portfolio Management Jul 2003, 29 (4) 93-102; DOI: 10.3905/jpm.2003.319898

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Portfolio Performance Evaluation Using Value at Risk
Gordon J. Alexander, Alexandre M. Baptista
The Journal of Portfolio Management Jul 2003, 29 (4) 93-102; DOI: 10.3905/jpm.2003.319898
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