Performance measures adjusted for the risk situation (PARS)

We introduce the new class of Performance measures Adjusted for the Risk Situation (PARS), which incorporate individual risk characteristics in the financial performance measure. The (risk) situation of an individual or company is represented by all of its future cash flows including (financial) consumption preferences; due to the effected risk transformation, PARS have zero volatility under the investment strategy replicating these future cash flows. We give several examples of cash flow structures for individuals and companies, showing how their PARS could be defined. In the context of a debt manager, we demonstrate how the PARS can be applied to the dynamic control of bond portfolios via sensitivities.