Benchmark-based strategy for minimizing Riskiness

Abstract

This study develops an optimal benchmark-based strategy for determining the optimal managed portfolio weight vector by minimizing the Riskiness (proposed by Aumann and Serrano [2008]) of active portfolio returns. First, for increasing and concave incentive fees, this study confirms that no other active portfolio returns have greater utility than those generated using this optimal strategy; this finding is applicable for all risk-averse fund managers and institutional investors. Second, the optimal managed portfolio weight vector is derived and can be estimated through method-of-moments estimation. Finally, this study empirically identifies the statistical characteristics of this optimal strategy.