Optimal Asset Allocation and Risk Shifting in Money Management

Posted: 26 Jun 2008

See all articles by Suleyman Basak

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: 2007


This article investigates a fund manager's risk-taking incentives induced by an increasing and convex relationship of fund flows to relative performance. In a dynamic portfolio choice framework, we show that the ensuing convexities in the manager's objective give rise to a finite risk-shifting range over which she gambles to finish ahead of her benchmark. Such gambling entails either an increase or a decrease in the volatility of the manager's portfolio, depending on her risk tolerance. In the latter case, the manager reduces her holdings of the risky asset despite its positive risk premium. Our empirical analysis lends support to the novel predictions of the model.

Keywords: G11, G20, D60, D81

Suggested Citation

Basak, Suleyman, Optimal Asset Allocation and Risk Shifting in Money Management (2007). Review of Financial Studies, Vol. 20, Issue 5, pp. 1583-1621, 2007, Available at SSRN: https://ssrn.com/abstract=1151565 or http://dx.doi.org/10.1093/rfs/hhm026

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Centre for Economic Policy Research (CEPR)

United Kingdom

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