A Theory of Mutual Funds: Optimal Fund Objectives and Industry Organization
This paper presents a model in which investors cannot remain in the market to trade at all times. As a result, they have an incentive to set up trading firms or financial market intermediaries (FMI's) to take over their portfolio while they engage in other activities. Previous research has assumed that such firms act like individuals endowed with a utility function. Here, as in reality, they are firms that simply take orders from their investors. From this setting emerges a theory of mutual funds and other FMI's (such as investment
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