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Table 1
Impact of a CVaR or VaR constraint within a mean-variance model on portfolio efficiency and selectiona
(a) Mean-variance efficient portfolios that are precluded by the presence of a CVaR or VaR constraintb
Bound L=V
Confidence level t
Constraint
Large
Moderate
Low
CVaR
none
small
VaR
none
none
Moderate
CVaR
large
small and large
VaR
none
none
High
CVaR
large
small and large
VaR
large
large

Small
small
small
small and large
small
small and large
small and large

27

(b) Impact of a CVaR constraint on the standard deviation of an agents optimal portfolioc
Bound L
Confidence level t
Agent
Large
Moderate
Low
Highly risk-averse
no effect
increase
Slightly risk-averse
no effect
no effect
Moderate
Highly risk-averse
no effect
increase
or High
Slightly risk-averse
decrease
decrease

Small
increase
no effect
increase
decrease

(c) Impact of a VaR constraint on the standard deviation of an agents optimal portfoliod
Bound V
Confidence level t
Agent
Large
Moderate
Low or
Highly risk-averse
no effect
no effect
Moderate
Slightly risk-averse
no effect
no effect
High
Highly risk-averse
no effect
no effect
Slightly risk-averse
decrease
decrease

Small
increase
no effect
increase
decrease

The confidence level is: (i) high if z t > D C , (ii) moderate if z t D C <k t , and (iii) low if k t D C . The bound is: (i) large if L = V L[t ,r m ],

(ii) moderate if V [t ,r m ] L = V < L[t ,r m ] , and (iii) small if L = V < V [t ,r m ] .

b

The entries in the cells show the characteristics of the portfolios that are precluded.
The impact is measured relative to the agents optimal portfolio in the absence of the CVaR constraint.
d
The impact is measured relative to the agents optimal portfolio in the absence of the VaR constraint.
c

Table 2
Constraint that results in the smallest standard deviation for the constrained optimal portfolioa
(a) CVaR and VaR bounds coincide
Confidence level t
Low
Moderate or
High

Agent
Highly risk-averse
Slightly risk-averse
Highly risk-averse
Slightly risk-averse

Large
both
both
both
CVaR

Bound L
Moderate
VaR
both
VaR
CVaR

Small
VaR
both
VaR
CVaR

Maximum
NA
NA
NA
NA
CVaR
both

Bound L
Intermediate
CVaR
both
CVaR
CVaR
CVaR
CVaR

Minimum
both
both
both
CVaR
both
CVaR

(b) CVaR bound appropriately larger than VaR boundb

Confidence level t
Low

28

Moderate
High
a

The confidence level is: (i)

Agent
Highly risk-averse
Slightly risk-averse
Highly risk-averse
Slightly risk-averse
Highly risk-averse
Slightly risk-averse

high if z t > D C , (ii) moderate if z t D C <k t , and (iii) low if k t D C . The bound is: (i) large if

L = V L[t ,r m ], (ii) moderate if V [t ,r m ] L = V < L[t ,r m ] , and (iii) small if L = V < V [t ,r m ] .

b

The CVaR bound is determined by equations (19) and (20), i.e., L L L . NA means does not apply.

Figure 1
Effect of the CVaR and VaR constraints in the efficient frontier when the confidence level is low

The dashed (dotted) line represents the CVaR (VaR) constraint. (a) When the bound is large, all efficient portfolios satisfy both constraints. (b) When the bound
is moderate, efficient portfolios with small standard deviations do not satisfy the CVaR constraint but satisfy the VaR constraint. (c) When the bound is small,
efficient portfolios with small standard deviations do not satisfy either constraint. Moreover, the CVaR constraint precludes more efficient portfolios with small

zt

a
b

c
m
d

Expected Rate of Return

kt

Expected Rate of Return

29

Expected Rate of Return

standard deviations than the VaR constraint.

e
f
m

-V=-L
-V=-L

-V=-L

Standard Deviation

Standard Deviation

Standard Deviation

(a) Large bound

(b) Moderate bound

(c) Small bound

Figure 2
Effect of the CVaR and VaR constraints in the efficient frontier when the confidence level is moderate

The dashed (dotted) line represents the CVaR (VaR) constraint. (a) When the bound is large, efficient portfolios with small standard deviations satisfy both
constraints. Moreover, efficient portfolios with large standard deviations do not satisfy the CVaR constraint but satisfy the VaR constraint. (b) When the bound
is moderate, efficient portfolios with both small and large standard deviations do not satisfy the CVaR constraint but satisfy the VaR constraint. (c) When the
bound is small, efficient portfolios with small and large standard deviations do not satisfy the CVaR constraint. The VaR constraint only precludes efficient

mL(t)
m g
h

-V=-L

mL(t)
i

m
j

Expected Rate of Return

Expected Rate of Return

30

Expected Rate of Return

portfolios with small standard deviations.

k
mL(t)
k
l

-V=-L

-V=-L

Standard Deviation

Standard Deviation

Standard Deviation

(a) Large bound

(b) Moderate bound

(c) Small bound

Figure 3
Effect of the CVaR and VaR constraints in the efficient frontier when the confidence level is high
The dashed (dotted) line represents the CVaR (VaR) constraint. (a) When the bound is large, efficient portfolios with large standard deviations do not satisfy
either constraint. Moreover, the CVaR constraint precludes more efficient portfolios with large standard deviations than the VaR constraint. (b) When the
bound is moderate, efficient portfolios with small and large standard deviations do not satisfy the CVaR constraint. The VaR constraint only precludes efficient
portfolios with large standard deviations. (c) When the bound is small, efficient portfolios with small and large standard deviations do not satisfy either
constraint. Moreover, the CVaR constraint precludes more efficient portfolios with both small and large standard deviations than the VaR constraint.

n
mL(t)
m
n

q
p
mL(t)
p
m
q

Expected Rate of Return

Expected Rate of Return

31

Expected Rate of Return

r
mL(t)
r
s
m

-V=-L
-V=-L

-V=-L

Standard Deviation

Standard Deviation

Standard Deviation

(a) Large bound

(b) Moderate bound

(c) Small bound

Figure 4
Effect of the CVaR and VaR constraints in the efficient frontier when the CVaR bound is larger than the VaR bound
The dashed (dotted) line represents the CVaR (VaR) constraint. (a) When the CVaR bound is equal to a large threshold value, the constraints preclude the same
efficient portfolios with large standard deviations. However, the VaR constraint precludes more efficient portfolios with small standard deviations than the
CVaR constraint. (b) When the CVaR bound is equal to an intermediate value, the CVaR constraint precludes more (less) efficient portfolios with large (small)
standard deviations than the VaR constraint. (c) When the CVaR bound is equal to a small threshold value, the constraints preclude the same efficient portfolios

32
t
mL(t)
t
u
m v

-V

Expected Rate of Return

Expected Rate of Return

mL(t)
x
m

z
y
mL(t)
y
m

-V
-L

-V
-L

-L

Expected Rate of Return

with small standard deviations. However, the CVaR constraint precludes more efficient portfolios with large standard deviations than the VaR constraint.

Standard Deviation

Standard Deviation

Standard Deviation

(a) Maximum CVaR bound

(b) Intermediate CVaR bound

(c) Minimum CVaR bound