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Optimal strategy for a fund manager with option compensation

I consider the problem of portfolio optimization for a manager whose compensation is given by the sum of a constant and a variable term. The constant term is a fixed percentage of the managed funds that is payed to the manager independently of his performance. The variable term is a premium that is...

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Bibliographic Details
Published in:Decisions in economics and finance 2018-05, Vol.41 (1), p.1-17
Main Author: Nicolosi, Marco
Format: Article
Language:English
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Summary:I consider the problem of portfolio optimization for a manager whose compensation is given by the sum of a constant and a variable term. The constant term is a fixed percentage of the managed funds that is payed to the manager independently of his performance. The variable term is a premium that is proportional to the profit earned by the manager over a benchmark at a certain evaluation date. I find the optimal strategy and the optimal portfolio value in the Black–Scholes setting when the benchmark is a linear combination of the risky asset and the money market account.
ISSN:1593-8883
1129-6569
DOI:10.1007/s10203-017-0204-x