Post by Sapphire Capital on Aug 21, 2008 22:50:47 GMT 4
Optimal Delegated Portfolio Management with Background Risk
Alexandre M. Baptista
George Washington University
Journal of Banking and Finance, Vol. 32, No. 6, 2008
Abstract:
Most investors delegate the management of a fraction of their wealth to portfolio managers who are given the task of beating a benchmark. However, in an influential paper [Roll, R., 1992. A mean/variance analysis of tracking error. Journal of Portfolio Management 18, 13-22] shows that the objective functions commonly used by these managers lead to the selection of portfolios that are suboptimal from the perspective of investors. In this paper, we provide an explanation for the use of these objective functions based on the effect of background risk on investors' optimal portfolios. Our main contribution is to provide conditions under which investors can optimally delegate the management of their wealth to portfolio managers.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1185370
Alexandre M. Baptista
George Washington University
Journal of Banking and Finance, Vol. 32, No. 6, 2008
Abstract:
Most investors delegate the management of a fraction of their wealth to portfolio managers who are given the task of beating a benchmark. However, in an influential paper [Roll, R., 1992. A mean/variance analysis of tracking error. Journal of Portfolio Management 18, 13-22] shows that the objective functions commonly used by these managers lead to the selection of portfolios that are suboptimal from the perspective of investors. In this paper, we provide an explanation for the use of these objective functions based on the effect of background risk on investors' optimal portfolios. Our main contribution is to provide conditions under which investors can optimally delegate the management of their wealth to portfolio managers.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1185370