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Optimum Centralized Portfolio Construction with Decentralized Portfolio Management

Published online by Cambridge University Press:  06 April 2009

Edwin J. Elton  and
Martin J. Gruber
Edwin J. Elton
Affiliation:
eelton@stern.nyu.edu Stern School of Business, New York University, 44 West 4th Street, Suite 9–190, New York, NY 10012
Martin J. Gruber
Affiliation:
mgruber@nyu.edu, Stern School of Business, New York University, 44 West 4th Street, Suite 9–190, New York, NY 10012.
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 3 , September 2004 , pp. 481 - 494
Copyright
Copyright © School of Business Administration, University of Washington 2004

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