Decentralized Portfolio Management

Paulo Coutinho and Benjamin Tabak

Brazilian Review of Finance, 2003, vol. 1, issue 2, 243-270

Abstract: We use a mean-variance model to analyze the problem of decentralized portfolio management. We find the solution for the optimal portfolio allocation for a head trader operating in different markets, which is called the optimal centralized portfolio. However, as there are many traders specialized in different markets, the solution to the problem of optimal decentralized allocation should be different from the centralized case. In this paper we derive conditions for the solutions to be equivalent. We use multivariate normal returns and a negative exponential function to solve the problem analytically. We generate the equivalence of solutions by assuming that different traders face different interest rates for borrowing and lending. This interest rate is dependent on the ratio of the degrees of risk aversion of the trader and the head trader, on the excess return, and on the correlation between asset returns.

Keywords: risk aversion; portfolio management; Markowitz; risk aversion; portfolio management; Markowitz (search for similar items in EconPapers)
JEL-codes: G10 G11 G13 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (21)

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Working Paper: Decentralized Portfolio Management (2001)
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