FIN-02-046 |
NYU Stern School of Business |
Optimum Centralized Portfolio Construction with
Decentralized Portfolio Management
October 2002
Edwin J. Elton and Martin J. Gruber
ABSTRACT
Many financial institutions employ outside portfolio managers to manage part or
all of their investable assets. These institutions include pension funds, private
endowments (e.g., colleges and charities), and private trusts. In 1999, the investment
company institute estimated that these institutions managed 5.2 trillion dollars in assets.
Most of these institutions employed outside managers to invest these funds. The
relevancy of this problem has been widely recognized in the practitioners literature on
portfolio? Furthermore, it is recognized in the prudent man law that spells out the
responsibilities of the centralized decision maker delegating management responsibility.2
For example the New York State law in estate power and trust states. Pension funds are
the largest and most likely organizations to employ several outside managers, each of
whom manages a part of the overall portfolio. In this paper we will use the pension fund
manager as the prototype of the centralized decision-maker trying to optimally manage a
set of decentralized portfolio managers but the analysts is general.
Edwin J. Elton
Institution: Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
Telephone: (212) 998-0361
Fax: (212) 995-4233
Email: eelton@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~eelton
Martin J. Gruber
Institution: Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
Telephone: (212) 998-0333
Fax: (212) 995-4233
Email: mgruber@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~mgruber
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