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Delegated Portfolio Management with Socially Responsible Investment Constraints

Listed author(s):
  • Fabretti, Annalisa


    (University of Rome “Tor Vergata")

  • Herzel, Stefano


    (University of Rome “Tor Vergata")

We 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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Paper provided by Sustainable Investment Research Platform in its series Sustainable Investment and Corporate Governance Working Papers with number 2010/7.

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Length: 22 pages
Date of creation: 10 Jun 2010
Handle: RePEc:hhb:sicgwp:2010_007
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Economics of Corporate Sustainability Management, Department of Industrial Economics and Management, Royal Institute of Technology, SE-100 44 Stockholm, SWEDEN

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