Economics at your fingertips  

Performance-sharing optimization by risk-constrained equity investors

Kris Boudt and Mulazim-Ali Khokhar

Finance Research Letters, 2021, vol. 38, issue C

Abstract: An investment project may be capital constrained when its risk exceeds the risk limit of prospective investors. We propose a new equity-contract in which the project’s performance-sharing across investors respects the individual investor’s risk limit while staying as close as possible to his/her percentage contribution in equity of the project. The proposed arrangement of performance-sharing thus ensures that the investors with constrained risk limits take less share of performance during high-risk episodes, while the less constrained investors are more exposed. The former pay a premium to the latter to compensate for the partial risk transfer. The proposed performance-sharing agreement is expected to be especially useful for risk-constrained equity investors who are restricted in their use of risk-free investments to reduce investment risk.

Keywords: Performance-sharing optimization; Investor risk limit; Risk-sharing; Risk-transfer; Musharakah (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2023-03-26
Handle: RePEc:eee:finlet:v:38:y:2021:i:c:s1544612320301793