Hostname: page-component-76fb5796d-45l2p Total loading time: 0 Render date: 2024-04-26T11:53:58.903Z Has data issue: false hasContentIssue false
  • English
  • Français

Optimum Centralized Portfolio Construction with Decentralized Portfolio Management

Published online by Cambridge University Press:  06 April 2009

Edwin J. Elton  and
Martin J. Gruber
Edwin J. Elton
Affiliation:
eelton@stern.nyu.edu Stern School of Business, New York University, 44 West 4th Street, Suite 9–190, New York, NY 10012
Martin J. Gruber
Affiliation:
mgruber@nyu.edu, Stern School of Business, New York University, 44 West 4th Street, Suite 9–190, New York, NY 10012.
Get access Rights & Permissions [Opens in a new window]

Abstract

Many financial institutions employ outside portfolio managers to manage part or all of their investable assets. It is well recognized that outside portfolio managers are unwilling to share security information with each other or with the centralized decision maker and this in general will lead to sub-optimal portfolios. In this paper, we derive an implementable set of rules under which a central decision maker can make optimal decisions without requiring decentralized decision makers to reveal estimates of security returns. Furthermore, we derive conditions under which these rules hold and when they do not hold.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 3 , September 2004 , pp. 481 - 494
Copyright
Copyright © School of Business Administration, University of Washington 2004

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Baks, K.; Metrick, A.; and Wachter, J.. “Should Investors Abort All Actively Managed Mutual Funds?” Journal of Finance, 56 (2001), 45–86.Google Scholar
Bawa, V.; Brown, S.; and Klein, R.. “Estimation Risk and Optimal Portfolio Choice.” Amsterdam: North Holland (1979).Google Scholar
Di Bartolomeo, D. “A Radical Proposal for the Operation of Multi-Manager Investment Funds.” Boston, MA: Northfield Information Services (1999).Google Scholar
Dybvig, P.; Farnsworth, H.; and Carpenter, J.. “Portfolio Performance and Agency.” Unpubl.Manuscript, New York Univ. (2000).Google Scholar
Elton, E. J.; Gruber, M. J.; and Padberg, M.. “Simple Criteria for Optimal Portfolio Selection. Journal of Finance, 11 (1976), 1341–1357.Google Scholar
Elton, E. J.; Gruber, M. J.; and Padberg, M.. “Simple Criteria for Optimal Portfolio Selection.” In Portfolio Theory: Twenty-Five Years Later, Elton, E. J. and Gruber, M. J., eds. Amsterdam: North Holland (1979).Google Scholar
Farrell, J. L. “The Multi-Index Model and Practical Portfolio Analysis.” Research Foundation of the Institute of Chartered Financial Analysts (1976).Google Scholar
Gervais, S.; Lynch, A. W.; and Musto, D. K.. “Delegated Monitoring of Fund Managers.” Unpubl. Manuscript, New York Univ. (2002).Google Scholar
Grinold, R., and Kaken, R.. Active Portfolio Management. Chicago, IL: Probus Publishing (1965).Google Scholar
Kihlstrom, R. E. “Optimal Contracts for Security Analysts and Portfolio Managers.” Studies in Banking and Finance, 5 (1988), 291–325.Google Scholar
Lintner, J. “The Valuation of Risk Assets on the Selection of Investments in Stock Portfolios in Capital Budgets.” Review of Economics and Statistics, 47 (1965), 13–37.CrossRefGoogle Scholar
Longstreth, B.Modern Investment Management and the Prudent Man Rule. Oxford, England: Oxford Univ. Press (1986).Google Scholar
Marschak, J., and Radner, R.. Economic Theory of Teams. New Haven, CT: Yale Univ. Press (1972). New York State Estates Powers and Trust Law. Section 11–2.3, Subsection (b) (4) (c).Google Scholar
Ohlson, J. “The Complete Ordering of Information Alternatives for a Class of Portfolio Selection Models.” Journal of Accounting Research, 13 (1975), 267–282.Google Scholar
Ohlson, J.. “Residual (API) Analysis and the Private Value of Information.” Journal of Accounting Research, 17 (1979), 506–527.CrossRefGoogle Scholar
Pastor, L., and Stambaugh, R.. “Investing in Equity Mutual Funds.” Unpubl. Manuscript, Wharton School of Business (2001).Google Scholar
Radner, R. “Team Decision Problems.” Annals of Mathematical Statistics, 33 (1962), 857–881.Google Scholar
Rosenberg, B. “Institutional Investment with Multiple Portfolio Managers.” Proceedings of the Seminar on the Analysis of Security Prices. Univ. of Chicago (1977), 55–160.Google Scholar
Sharpe, W. F. Decentralized Investment Management. Journal of Finance, 36 (1981), 217–234.Google Scholar
Stoughton, N. M. “Moral Hazard and the Portfolio Management Problem.” Journal of Finance, 48 (1993), 2009–2028.CrossRefGoogle Scholar
Treynor, J., and Black, F.. “How to Use Security Analysis to Improve Portfolio Selection. Journal of Business, 46 (1973), 66–86.CrossRefGoogle Scholar
Zender, J. F. ‘Asymmetric Information in Financial Markets.” Ph.D. Diss., Yale Univ. (1988).Google Scholar