Relative Portfolio Performance Evaluation and Incentive Structure

Posted: 16 Jul 2004

See all articles by Yoon K. Choi

Yoon K. Choi

University of Central Florida - College of Business Administration - Department of Finance

Abstract

Recent literature on mutual fund performance evaluation has improved on methodologies, especially on benchmark problems pointed out by Roll (1990). However, mutual fund managers are the agents of investors, and their efforts to improve their fund performance are influenced by either explicit or implicit incentive structures within mutual fund organizations. An efficient fund evaluation should control for organizational elements that affect managerial incentives in evaluating their performance.

This paper proposes an incentive-compatible portfolio performance evaluation measure. This new performance is derived from a principal-agent economics model, where managers are to maximize investors' gross returns net of managerial compensation. I consider the effect of organizational elements such as economies of scale on incentive and thus on performance. Finally, I compare this new measure with the Sharpe ratio.

Suggested Citation

Choi, Yoon K., Relative Portfolio Performance Evaluation and Incentive Structure. Journal of Business, Forthcoming, Available at SSRN: https://ssrn.com/abstract=564642

Yoon K. Choi (Contact Author)

University of Central Florida - College of Business Administration - Department of Finance ( email )

PO Box 161400
Orlando, FL 32816
United States
(407) 823-5023 (Phone)

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