Optimum Centralized Portfolio Construction with Decentralized Portfolio Management

Edwin J. Elton and Martin J. Gruber

Journal of Financial and Quantitative Analysis, 2004, vol. 39, issue 3, 481-494

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.

Date: 2004
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