Delegated Portfolio Management with Socially Responsible Investment Constraints
AbstractWe consider the problem of how to set a compensation for a portfolio manager who is required to restrict the investment set, as it happens when applying socially responsible screening. This is a problem of Delegated Portfolio Management where the reduction of the investment opportunities to the subset of sustainable assets involves a loss in the expected earnings for the portfolio manager, compensated by the investor through an extra bonus on the realized return. Under simple assumptions on the investor, the manager and the market, we compute the optimal bonus as a function of the manager's risk aversion and his expertise, and of the impact of the portfolio restriction on the Mean Variance efficient frontier. We conclude by discussing the problem of selecting the best managers when his ability is not directly observable by the investor.
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Bibliographic InfoPaper provided by Sustainable Investment Research Platform in its series Sustainable Investment and Corporate Governance Working Papers with number 2010/7.
Length: 22 pages
Date of creation: 10 Jun 2010
Date of revision:
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Postal: Economics of Corporate Sustainability Management, Department of Industrial Economics and Management, Royal Institute of Technology, SE-100 44 Stockholm, SWEDEN
Phone: 08-790 78 61
Fax: 08-790 76 17
Web page: http://www.sirps.se
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Delegated portfolio management; Socially responsible investment; Incentives; Extrinsic incentives; Intrinsic motives;
Other versions of this item:
- A. Fabretti & S. Herzel, 2012. "Delegated portfolio management with socially responsible investment constraints," The European Journal of Finance, Taylor & Francis Journals, vol. 18(3-4), pages 293-309, April.
- NEP-ALL-2010-06-26 (All new papers)
- NEP-CTA-2010-06-26 (Contract Theory & Applications)
- NEP-PPM-2010-06-26 (Project, Program & Portfolio Management)
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- Annalisa Fabretti & Stefano Herzel & Mustafa C. Pinar, 2014. "Delegated Portfolio Management under Ambiguity Aversion," CEIS Research Paper 304, Tor Vergata University, CEIS, revised 06 Feb 2014.
- Sheng, Jiliang & Wang, Xiaoting & Yang, Jun, 2012. "Incentive contracts in delegated portfolio management under VaR constraint," Economic Modelling, Elsevier, vol. 29(5), pages 1679-1685.
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