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| Author: | Palomino, F. Prat, A. |
| Title: | Risk taking and optimal contracts for money managers |
| Journal: | RAND Journal of Economics
2003 : SPRING, VOL. 34:1, p. 113-137 |
| Index terms: | Risk management Portfolio management Contracts Agencies Optimization |
| Language: | eng |
| Abstract: | The authors study delegated portfolio management when the agent controls the riskiness of the portfolio. Under general conditions, they show that the optimal contract is simply a bonus contract: the agent is paid a fixed sum if the portfolio return is above a threshold. They derive a criterion to decide whether the optimal contract induces excessive or insufficient risk. If a deviation from efficient risk taking causes a large reduction in the expected return of the portfolio, the optimal contract induces excessive (insufficient) risk. |
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