 Optimal portfolio delegation when parties have different coefficients of risk aversionKasper Larsen Quantitative Finance, 2005, vol. 5, issue 5, 503-512 Abstract: We consider the problem of delegated portfolio management when the involved parties are risk-averse. The agent invests the principal's money in the financial market, and in return he receives a compensation which depends on the value that he generates over some period of time. We use a dual approach to explicitly solve the agent's problem analytically and subsequently we use this solution to solve the principal's problem numerically. The interaction between the principal's and the agent's risk aversion and the optimal compensation scheme is studied and, for example, in the case of the more risk averse agent according to common folklore the principal should optimally choose a fee schedule such that the agent's derived risk aversion decreases. We illustrate that this is not always the case. Keywords: Principal-agent theory; risk sharing; incentive inducement; non-smooth and non-concave utility optimization; piecewise affine fee schedules (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:5:y:2005:i:5:p:503-512 Ordering information: This journal article can be ordered from DOI: 10.1080/14697680500305204 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
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