Delegated portfolio management

Abstract A problem of screening agents with privately known forecasting abilities and reservation utilities and then eliciting truthful information from these agents once they are employed is considered. For the case of risk averse agents and large principals, an approximately optimal solution is constructively characterized under the assumption that payoffs are normally distributed. A significant extension of the deFinnetti-Savage probability elicitation result is developed. Under this extension knowledge of agent preferences is not required (when the underlying conditional distributions are symmetric) and this fact is exploited to solve the screening problem in a mean-variance formulation.

[1]  Anat R. Admati,et al.  Measuring Investment Performance in a Rational Expectations Equilibrium Model , 1985 .

[2]  Manfred W. Padberg,et al.  SIMPLE CRITERIA FOR OPTIMAL PORTFOLIO SELECTION: TRACING OUT THE EFFICIENT FRONTIER , 1978 .

[3]  L. J. Savage.  Elicitation of Personal Probabilities and Expectations , 1971 .

[4]  S. Ross.  The Economic Theory of Agency: The Principal's Problem , 1973 .

[5]  D. Heckerman.  Motivating managers to make investment decisions , 1975 .

[6]  Richard Roll,et al.  AMBIGUITY WHEN PERFORMANCE IS MEASURED BY THE SECURITIES MARKET LINE , 1978 .

[7]  H. Markowitz.  Portfolio Selection: Efficient Diversification of Investments , 1971 .

[8]  William F. Sharpe,et al.  Decentralized Investment Management , 1981 .

[9]  J. Tobin.  Liquidity Preference as Behavior towards Risk , 1958 .

[10]  Sudipto Bhattacharya,et al.  Nondissipative Signaling Structures and Dividend Policy , 1980 .

[11]  Gerard Gennotte.  Optimal Portfolio Choice Under Incomplete Information , 1986 .

[12]  R. Burr Porter,et al.  An Empirical Comparison of Stochastic Dominance and Mean-Variance Portfolio Choice Criteria , 1973, Journal of Financial and Quantitative Analysis.

[13]  The derivation of efficient sets , 1976 .

[14]  K. Arrow.  Essays in the theory of risk-bearing , 1958 .

[15]  M. Padberg,et al.  Simple Criteria for Optimal Portfolio Selection , 1976 .

[16]  E. Elton.  Modern portfolio theory and investment analysis , 1981 .

[17]  D. Blackwell.  Comparison of Experiments , 1951 .

[18]  A. Roy.  Safety first and the holding of assetts , 1952 .

[19]  Steven A. Matthews.  Selling to risk averse buyers with unobservable tastes , 1983 .

[20]  David P. Baron,et al.  A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues , 1982 .

[21]  M. Rothschild,et al.  Increasing risk: I. A definition , 1970 .

[22]  R. Myerson.  Incentive Compatibility and the Bargaining Problem , 1979 .