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http://hdl.handle.net/2451/26609
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| Title: | OPTIMUM CENTRALIZED PORTFOLIO CONSTRUCTION WITH DECENTRALIZED PORTFOLIO MANAGEMENT |
| Authors: | Elton, Edwin J.
Gruber, Martin J. |
| Issue Date: | Dec-2001 |
| Series/Report no.: | FIN-01-056 |
| Abstract: | Many financial institutions employ outside portfolio managers to manage
part or all of their investable assets. These institutions include
pension funds, private endowments (e.g., colleges and charities), and
private trusts. Pension funds are the largest and most likely
organizations to employ several outside managers, each of whom manages a
part of the overall portfolio. In this paper we will use the pension
fund manager as the prototype of the centralized decision-maker trying
to optimally manage a set of decentralized decision-makers but the
analysts is general. If the centralized decision-maker (CDM) is a mean
variance maximizer, the CDM could construct a portfolio using standard
portfolio theory and estimates of mean return, variances, and
covariances between the portfolios constructed by a group of
decentralized managers. However, this overall portfolio is unlikely to
be optimum since the individually managed portfolios themselves were
constructed without taking into account the portfolios of the other
managers. The purpose of this article is to set up a structure that
leads to the optimum portfolio from the viewpoint of the CDM when there
are multiple managers and their portfolios are constructed without
reference to each other. |
| URI: | http://hdl.handle.net/2451/26609 |
| Appears in Collections: | Economics Working Papers
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