A Delegated-Agent Asset-Pricing Model

Posted: 5 Feb 2005

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Richard Roll

California Institute of Technology

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Abstract

Asset-pricing theory has traditionally made predictions about risk and return but has been silent on the actual process of investment. Today, most investors delegate major investment decisions to financial professionals. This suggests that the instructions given by investors to their delegated agents and the compensation of those agents might be important determinants of capital market equilibrium. In the extreme, when all investment decisions are delegated, the preferences and beliefs of individuals would be completely superseded by the objective functions of agent/managers. A provocative illustration of the difference between direct and delegated investing is provided based on active asset management relative to a benchmark index, a common objective function in practice. With the growing preponderance of delegated investing, future asset-pricing theory will not only have to describe risk and return but, to be complete, must also be able to explain the observed objective functions used by professional managers.

Keywords: Investment Theory, CAPM, APT, and Other Pricing Theories, Portfolio Theory

Suggested Citation

Cornell, Bradford and Roll, Richard W., A Delegated-Agent Asset-Pricing Model. Available at SSRN: https://ssrn.com/abstract=661425

Bradford Cornell (Contact Author)

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

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