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Relative Portfolio Performance Evaluation and Incentive Structure

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  • Yoon K. Choi

    (University of Central Florida)

Abstract

Mutual fund managers are the agents of investors, and their efforts to improve their performance are influenced by either explicit or implicit incentive structures within fund organizations. An efficient fund evaluation should control for organizational elements that affect managerial incentives in evaluating their performance. I propose an incentive-compatible portfolio performance evaluation measure in which managers are to maximize investors' gross returns net of managerial compensation. I consider the effect of organizational elements such as economies of scale on incentive and thus on performance. Finally, I compare this new measure with the Sharpe ratio.

Suggested Citation

  • Yoon K. Choi, 2006. "Relative Portfolio Performance Evaluation and Incentive Structure," The Journal of Business, University of Chicago Press, vol. 79(2), pages 903-922, March.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:2:p:903-922
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    File URL: http://dx.doi.org/10.1086/499142
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    Cited by:

    1. Jin-Li Hu & Tzu-Pu Chang & Ray Chou, 2014. "Market conditions and the effect of diversification on mutual fund performance: should funds be more concentrative under crisis?," Journal of Productivity Analysis, Springer, vol. 41(1), pages 141-151, February.

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