Download or read book Optimal Delegated Portfolio Management with Background Risk written by Alexandre M. Baptista and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Essays on Delegated Portfolio Management and Optimal Contracting written by Raymond Chi Wai Leung and published by . This book was released on 2016 with total page 234 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation is a compilation of three papers that investigate the role of optimal contracting in a delegated portfolio management setting. While the study of optimal contracts in classical principal-agent setup has been extensively studied, relatively few have been studied in the context of delegated portfolio management in finance. And even delegated portfolio management papers in finance, there are still several open questions and unresolved issues that are beyond the scope of a standard principal-agent problem. In Chapter 1, I study a continuous-time principal-agent problem with drift and stochastic volatility control. While the problem with drift-only control by an agent has been extensively studied recently, very few existing papers allow an agent to endogenously influence volatility. Endogenous volatility control is particularly important in delegated portfolio management settings as volatility is one of the defining aspects of modern financial portfolio management. In Chapter 2, I study a model that encompasses dynamic agency, delegated portfolio management and asset pricing. Traditionally, the fields of ``asset pricing'' and ``corporate finance'' are studied independently of each other. However, as the modern portfolio management industry blooms in size and influence, the role of the portfolio manager and the contracts that are extended to them arguably has a role in the securities that they invest in, and hence in equilibrium, the asset pricing implications of the market overall. This paper is an attempt to bridge ``asset pricing'' and ``corporate finance'' (specifically interpreted to mean delegated portfolio management contracting) into one. In Chapter 3, I study whether a principal investor is better off delegating most of his money to a single portfolio manager (centralized delegation), as opposed to multiple portfolio managers (decentralized delegation), especially when there is the possible presence of moral hazard. With the size of the hedge fund industry and growing empirical support that moral hazard is a growing risk among hedge fund managers, it becomes imperative to understand when an investor decides to delegate his money, should it be delegated in a more centralized or decentralized fashion.

Download or read book Delegated Portfolio Management Benchmarking and the Effects on Financial Markets written by Ms.Deniz Igan and published by International Monetary Fund. This book was released on 2015-09-08 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze the implications of linking the compensation of fund managers to the return of their portfolio relative to that of a benchmark—a common solution to the agency problem in delegated portfolio management. In the presence of such relativeperformance- based objectives, investors have reduced expected utility but markets are typically more informative and deeper. Furthermore, in a multiple asset/market framework we show that (i) relative performance concerns lead to an increase in the correlation between markets (financial contagion); (ii) benchmark inclusion increases price volatility; (iii) home bias emerges as a rational outcome. When information is costly, information acquisition is hindered and this attenuates the effects on informativeness and depth of the market.

Download or read book Portfolio Theory and Management written by H. Kent Baker and published by Oxford University Press. This book was released on 2013-01-07 with total page 798 pages. Available in PDF, EPUB and Kindle. Book excerpt: Portfolio management is an ongoing process of constructing portfolios that balances an investor's objectives with the portfolio manager's expectations about the future. This dynamic process provides the payoff for investors. Portfolio management evaluates individual assets or investments by their contribution to the risk and return of an investor's portfolio rather than in isolation. This is called the portfolio perspective. Thus, by constructing a diversified portfolio, a portfolio manager can reduce risk for a given level of expected return, compared to investing in an individual asset or security. According to modern portfolio theory (MPT), investors who do not follow a portfolio perspective bear risk that is not rewarded with greater expected return. Portfolio diversification works best when financial markets are operating normally compared to periods of market turmoil such as the 2007-2008 financial crisis. During periods of turmoil, correlations tend to increase thus reducing the benefits of diversification. Portfolio management today emerges as a dynamic process, which continues to evolve at a rapid pace. The purpose of Portfolio Theory and Management is to take readers from the foundations of portfolio management with the contributions of financial pioneers up to the latest trends emerging within the context of special topics. The book includes discussions of portfolio theory and management both before and after the 2007-2008 financial crisis. This volume provides a critical reflection of what worked and what did not work viewed from the perspective of the recent financial crisis. Further, the book is not restricted to the U.S. market but takes a more global focus by highlighting cross-country differences and practices. This 30-chapter book consists of seven sections. These chapters are: (1) portfolio theory and asset pricing, (2) the investment policy statement and fiduciary duties, (3) asset allocation and portfolio construction, (4) risk management, (V) portfolio execution, monitoring, and rebalancing, (6) evaluating and reporting portfolio performance, and (7) special topics.

Download or read book Delegated Portfolio Management Under Ambiguity Aversion written by Annalisa Fabretti and published by . This book was released on 2015 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the problem of setting optimal incentives for a portfolio manager hired by an investor who wants to induce ambiguity-robust portfolio choices with respect to estimation errors in expected returns. We consider a one-period model with a set of risky assets (with multivariate normal returns) whose expected returns are estimated with uncertainty and a linear sharing rule between a risk-neutral investor and a risk averse portfolio manager. The manager accepts the contract if the compensation off ered is at least as large as a minimum compensation he determines from his minimum acceptable utility level. Adopting a worst-case max-min approach we obtain in closed-form the optimal compensation in various cases where the investor and the manager, respectively adopt or relinquish an ambiguity averse attitude. We apply our result to compute the compensation fees for an investment strategy restricted by Socially Responsible rules. The application shows, for instance, that the additional premium requested by a manager for restricting the investment set should decrease when the aversion to ambiguity increases.

Download or read book Asset Pricing Implications of Delegated Portfolio Management and Benchmarking written by Philippe Rohner and published by Cuvillier Verlag. This book was released on 2010-06-11 with total page 210 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Delegated Portfolio Management written by Andreas Kremer and published by . This book was released on 2012 with total page 196 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book A Model of Asset Pricing and Portfolio Delegation written by Navneet Arora and published by . This book was released on 2002 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: Previous analysis of equilibrium asset prices often ignore the effects of delegated portfolio management and those of delegated portfolio management problems often ignore information and equilibrium asset prices. This paper develops a dynamic model that simultaneously considers optimal contracting and equilibrium asset prices under differential information. We consider a case in which investors can contract on various signals as well as a case in which investors constrain the contract form to be of a linear function of the terminal value of their portfolios. Optimal contracts and equilibrium asset prices are characterized in both cases. We examine the impact of portfolio delegation and risk sharing on portfolio managers' trading behavior, the autocorrelation in stock returns, and the persistence of fund performance. We find that due to the less optimal risk sharing contract, the risk premium on the stock as well as the autocorrelations in both stock and fund returns are substantially higher in case 1 than in case 2. In particular, we find that under certain conditions, the autocorrelations in fund returns are positive, suggesting the persistence of fund performance. The presence of differential information among funds reduces autocorrelations in stock and fund returns, but the costs associated with managing the portfolio enhance them.

Download or read book Active Portfolio Management A Quantitative Approach for Producing Superior Returns and Selecting Superior Returns and Controlling Risk written by Richard C. Grinold and published by McGraw Hill Professional. This book was released on 1999-11-16 with total page 596 pages. Available in PDF, EPUB and Kindle. Book excerpt: "This new edition of Active Portfolio Management continues the standard of excellence established in the first edition, with new and clear insights to help investment professionals." -William E. Jacques, Partner and Chief Investment Officer, Martingale Asset Management. "Active Portfolio Management offers investors an opportunity to better understand the balance between manager skill and portfolio risk. Both fundamental and quantitative investment managers will benefit from studying this updated edition by Grinold and Kahn." -Scott Stewart, Portfolio Manager, Fidelity Select Equity ® Discipline Co-Manager, Fidelity Freedom ® Funds. "This Second edition will not remain on the shelf, but will be continually referenced by both novice and expert. There is a substantial expansion in both depth and breadth on the original. It clearly and concisely explains all aspects of the foundations and the latest thinking in active portfolio management." -Eric N. Remole, Managing Director, Head of Global Structured Equity, Credit Suisse Asset Management. Mathematically rigorous and meticulously organized, Active Portfolio Management broke new ground when it first became available to investment managers in 1994. By outlining an innovative process to uncover raw signals of asset returns, develop them into refined forecasts, then use those forecasts to construct portfolios of exceptional return and minimal risk, i.e., portfolios that consistently beat the market, this hallmark book helped thousands of investment managers. Active Portfolio Management, Second Edition, now sets the bar even higher. Like its predecessor, this volume details how to apply economics, econometrics, and operations research to solving practical investment problems, and uncovering superior profit opportunities. It outlines an active management framework that begins with a benchmark portfolio, then defines exceptional returns as they relate to that benchmark. Beyond the comprehensive treatment of the active management process covered previously, this new edition expands to cover asset allocation, long/short investing, information horizons, and other topics relevant today. It revisits a number of discussions from the first edition, shedding new light on some of today's most pressing issues, including risk, dispersion, market impact, and performance analysis, while providing empirical evidence where appropriate. The result is an updated, comprehensive set of strategic concepts and rules of thumb for guiding the process of-and increasing the profits from-active investment management.

Download or read book Delegated Portfolio Management Optimal Fee Contracts and Asset Prices written by Yuki Sato and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Two Essays in Analyzing Delegated Portfolio Management Relationships Through Relative Portfolio Measures written by David L. Stowe and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In my first essay, I demonstrate how the Cremers and Petajisto (2009) Active Share measure can be re-parameterized into the standard portfolio parameters we typically see in other portfolio management studies, namely betas and standard deviations. This demonstrates that Active Share is not very different than the measures we traditionally use to study portfolio management. One of the parameters that results from the re-parameterization is a measure of the risk of the manager's active bets, the volatility of the implied hedge position relative to the benchmark. This parameter is equally as strong as Active Share in predicting excess performance and helps give a better economic understanding of why Active Share exhibits predictive power. Active Share and this implied hedge measure are like a confidence and information problem. In my second essay, I use the idea of benchmark relative investment optimization as outlined in Roll (1992). These portfolios are sub-optimal but they can be better than the alternative, i.e., better than the portfolios that the principals could build themselves. I outline the conditions under which delegated managers increase the principal's utility. Additionally, if implemented properly, tracking error constraints, Jorion (2003) and beta constraints, Roll (1992), can force the delegated manager to buy a more efficient portfolio than the benchmark. Thus, even though relative utility maximization is sub-optimal, if the delegated manager is more skillful than the principal in portfolio construction, delegated portfolio management is still likely preferred to naively holding the benchmark.

Download or read book Optimal Portfolio Delegation when Parties Have Different Coefficients of Risk Aversion written by Kasper Larsen and published by . This book was released on 2004 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Delegated Dynamic Portfolio Management under Mean Variance Preferences written by Coskun Cetin and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider a complete financial market with deterministic parameters where an investor and a fund manager have mean-variance preferences. The investor is allowed to borrow with risk-free rate and dynamically allocate his wealth in the fund provided his holdings stay nonnegative. The manager gets proportional fees instantaneously for her management services. We show that the manager can eliminate all her risk, at least in the constant coefficients case. Her own portfolio is a proportion of the amount the investor holds in the fund. The equilibrium optimal strategies are independent of the fee rate although the portfolio of each agent depends on it. An optimal fund weight is obtained by the numerical solution of a nonlinear equation and is not unique in general. In one-dimensional case, the investor's risk is inversely proportional to the weight of the risky asset in the fund. We also generalize the problem to the case of multiple managers and provide some examples.

Download or read book Risk Taking and Optimal Contracts for Money Managers written by Frederic Palomino and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We study delegated portfolio management when the agent controls the riskiness of the portfolio. Under general conditions, we show that the optimal contract is simply a bonus contract: the agent is paid a fixed sum if the portfolio return is above a threshold. We derive a criterion to decide whether the optimal contract induces excessive or insufficient risk. If a deviation from efficient risk taking causes a large (small) reduction in the expected return of the portfolio, the optimal contract induces excessive (insufficient) risk. In other words, the cheaper it is to play with risk, the less risk the agent takes.

Download or read book Continuous Time Delegated Portfolio Management with Homogeneous Expectations written by Holger Kraft and published by . This book was released on 2005 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: In a continuous-time framework, the issue of how to delegate an investor's portfolio decision to a portfolio manager is studied. Firstly, we solve the first-best problem where the investor is able to force the manager to implement a certain strategy. For the second-best case, a specific quadratic contract is introduced resolving the agency conflict completely in the sense that the solutions to the first-best and second-best problems coincide. This contract can be implemented if the investor is able to observe the value of the growth optimal portfolio at her investment horizon. Consequently, this portfolio serves as a perfect benchmark. Instead of the quadratic contract, one can also use a contract containing a suitable exchange option. If the investment opportunity set is assumed to be constant, in equilibrium the value of the market portfolio is a sufficient statistic for the value of the growth optimal portfolio. Hence, in this situation, even a portfolio with a constant number of assets (passive index) can replace the growth optimal portfolio in the quadratic contract. Throughout the paper we assume both the investor and the manager to have homogeneous expectations about the investment opportunity set, i.e. both individuals are equally well informed about the parameters of the asset price dynamics. This, however, does not necessarily mean that investor and manager are symmetrically informed about all prices.

Download or read book Dynamic Agency Delegated Portfolio Management and Asset Pricing written by Raymond C. W. Leung and published by . This book was released on 2014 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study a dynamic contracting problem in continuous-time dynamically complete market general equilibrium, whereby an investor must delegate all his portfolio choice problems to a manager. This framework is one of the first attempts to attack a combined dynamic contracting and dynamic asset pricing problem. The portfolio manager can exert costly private monitoring effort costs to increase the expected dividend growth rate of a representative firm. The investor can only observe the dividends of the firm over time, and will consider a pie sharing rule contract over the dividends of consumption goods to dynamically incentivize the manager. The key result is that dynamic moral hazard and dynamic optimal contracting endogenously generates stochastic volatility in the asset returns, and substantial state varying stochasticity in the market price of risk and the risk free rate; this is in sharp contrast to an economy without the presence of agency and dynamic contracts where the market price of risk, risk free rate and asset volatility are all constant. Our results raise the question whether a traditionally viewed "idiosyncratic" risk, namely incentives and compensation contracts of fund managers, are priced in that they do affect asset pricing in equilibrium.

Download or read book Active Portfolio Management A Quantitative Approach for Producing Superior Returns and Selecting Superior Returns and Controlling Risk written by Richard C. Grinold and published by McGraw Hill Professional. This book was released on 1999-11-16 with total page 596 pages. Available in PDF, EPUB and Kindle. Book excerpt: "This new edition of Active Portfolio Management continues the standard of excellence established in the first edition, with new and clear insights to help investment professionals." -William E. Jacques, Partner and Chief Investment Officer, Martingale Asset Management. "Active Portfolio Management offers investors an opportunity to better understand the balance between manager skill and portfolio risk. Both fundamental and quantitative investment managers will benefit from studying this updated edition by Grinold and Kahn." -Scott Stewart, Portfolio Manager, Fidelity Select Equity ® Discipline Co-Manager, Fidelity Freedom ® Funds. "This Second edition will not remain on the shelf, but will be continually referenced by both novice and expert. There is a substantial expansion in both depth and breadth on the original. It clearly and concisely explains all aspects of the foundations and the latest thinking in active portfolio management." -Eric N. Remole, Managing Director, Head of Global Structured Equity, Credit Suisse Asset Management. Mathematically rigorous and meticulously organized, Active Portfolio Management broke new ground when it first became available to investment managers in 1994. By outlining an innovative process to uncover raw signals of asset returns, develop them into refined forecasts, then use those forecasts to construct portfolios of exceptional return and minimal risk, i.e., portfolios that consistently beat the market, this hallmark book helped thousands of investment managers. Active Portfolio Management, Second Edition, now sets the bar even higher. Like its predecessor, this volume details how to apply economics, econometrics, and operations research to solving practical investment problems, and uncovering superior profit opportunities. It outlines an active management framework that begins with a benchmark portfolio, then defines exceptional returns as they relate to that benchmark. Beyond the comprehensive treatment of the active management process covered previously, this new edition expands to cover asset allocation, long/short investing, information horizons, and other topics relevant today. It revisits a number of discussions from the first edition, shedding new light on some of today's most pressing issues, including risk, dispersion, market impact, and performance analysis, while providing empirical evidence where appropriate. The result is an updated, comprehensive set of strategic concepts and rules of thumb for guiding the process of-and increasing the profits from-active investment management.