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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27410
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| Title: | Portfolio Performance and Agency |
| Authors: | Dybvig, Philip H.
Farnsworth, Heber K.
Carpenter, Jennifer |
| Issue Date: | Dec-1999 |
| Series/Report no.: | S-AM-99-01 |
| Abstract: | The evaluation and compensation of portfolio managers is an important
problem for practitioners. Optimal compensation will induce managers to
expend effort to generate information and to use it appropriately in an
informed portfolio choice. Our general model points the way towards
analysis of optimal performance evaluation and contracting in a rich
model. Optimal contracting in the model includes an important role for
portfolio restrictions that are more complex than the sharing rule. The
agent's compensation gives the agent approximately to benchmark return
plus an incentive fee equal to a portfolio measure that is approximately
the excess of return above the benchmark. This measure is often used by
practitioners but is simpler than the Jensen measure and other measures
commonly recommended in the academic literature. In addition to the
excess return above the fixed benchmark, the manager is given some
additional incentive to take a position that deviates from the benchmark
to remove an incentive to tend towards being a "closet
indexer." Efficient contracting involves restrictions on what
portfolio strategies can be pursued, and prior communication of the
information gathered. |
| URI: | http://hdl.handle.net/2451/27410 |
| Appears in Collections: | Asset Management
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