Robust Portfolios and Weak Incentives in Long Run Investments
35 Pages Posted: 11 Jun 2013 Last revised: 8 Oct 2013
Date Written: June 11, 2013
When the planning horizon is long, and the safe asset grows indefinitely, iso-elastic portfolios are nearly optimal for investors who are close to iso-elastic for high wealth, and not too risk averse for low wealth. We prove this result in a general arbitrage-free, frictionless, semi-martingale model. As a consequence, optimal portfolios are robust to the perturbations in preferences induced by common option compensation schemes, and such incentives are weaker when their horizon is longer. Robust option incentives are possible, but require several arbitrarily large exercise prices, and are not always convex.
Keywords: long run, portfolio choice, incentives, executive compensation
JEL Classification: G11, J33
Suggested Citation: Suggested Citation