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Decisions in Economics and Finance

07-12-2017

Optimal strategy for a fund manager with option compensation

Author: Marco Nicolosi

Published in: Decisions in Economics and Finance

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Abstract

I consider the problem of portfolio optimization for a manager whose compensation is given by the sum of a constant and a variable term. The constant term is a fixed percentage of the managed funds that is payed to the manager independently of his performance. The variable term is a premium that is proportional to the profit earned by the manager over a benchmark at a certain evaluation date. I find the optimal strategy and the optimal portfolio value in the Black–Scholes setting when the benchmark is a linear combination of the risky asset and the money market account.

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Notation \(f(x)\sim g(x)\) for \(x\rightarrow +\infty \) means that \(\lim _{x\rightarrow +\infty }\frac{f(x)}{g(x)} = l\) for a constant \(l\ne 0\).

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Title: Optimal strategy for a fund manager with option compensation
Author: Marco Nicolosi
Publication date: 07-12-2017
Publisher: Springer Milan
Published in: Decisions in Economics and Finance
Print ISSN: 1593-8883
Electronic ISSN: 1129-6569
DOI: https://doi.org/10.1007/s10203-017-0204-x