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How the Financial Managers’ Remuneration Can Affect the Optimal Portfolio Composition ?

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  • Francesco MENONCIN

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

In this paper we analyse the problem of an investor who must decide whether to manage his wealth by himself or give it in outsourcing. Financial managers are supposed to charge a commission composed of a fixed (A) and a variable (x) part, both deducted from portfolio payoffs. We demonstrate that the optimal portfolio composition crucially depends on the magnitude of A and x. We make a general analysis of this dependence and, in particular, we show that high level of A (respectively, x) lead to an outsourced portfolio which has a lower (respectively, higher) risk-return profile with respect to the self-managed portfolio.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2002022.

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Length: 19
Date of creation: 01 Jun 2002
Date of revision:
Handle: RePEc:ctl:louvir:2002022

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Keywords: optimal portfolio; outsourcing; managers’remuneration;

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References

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  1. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
  2. Cox, John C. & Huang, Chi-fu, 1991. "A variational problem arising in financial economics," Journal of Mathematical Economics, Elsevier, vol. 20(5), pages 465-487.
  3. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Kim, Tong Suk & Omberg, Edward, 1996. "Dynamic Nonmyopic Portfolio Behavior," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 141-61.
  5. Menoncin, Francesco, 2002. "Optimal portfolio and background risk: an exact and an approximated solution," Insurance: Mathematics and Economics, Elsevier, vol. 31(2), pages 249-265, October.
  6. Wachter, Jessica A., 2002. "Portfolio and Consumption Decisions under Mean-Reverting Returns: An Exact Solution for Complete Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(01), pages 63-91, March.
  7. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
  8. Blake, David, 1998. "Pension schemes as options on pension fund assets: implications for pension fund management," Insurance: Mathematics and Economics, Elsevier, vol. 23(3), pages 263-286, December.
  9. Lioui, Abraham & Poncet, Patrice, 2001. "On optimal portfolio choice under stochastic interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 25(11), pages 1841-1865, November.
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