How suboptimal are linear sharing rules?
The objective of this paper is to analyze criteria for portfolio choice when two investors are forced to invest in a common portfolio and share the proceeds by a linear sharing rule. A similar situation with many investors is typical for defined contribution pension schemes. The restriction implies...
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| Veröffentlicht in: | Annals of finance 2016-05, Vol.12 (2), p.221-243 |
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| container_title | Annals of finance |
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| creator | Jensen, Bjarne Astrup Nielsen, Jørgen Aase |
| description | The objective of this paper is to analyze criteria for portfolio choice when two investors are forced to invest in a common portfolio and share the proceeds by a linear sharing rule. A similar situation with many investors is typical for defined contribution pension schemes. The restriction implies two sources of suboptimal investment decisions as seen from each of the two investors individually. One is the suboptimal choice of portfolio, the other is the forced linear sharing rule. We measure the combined consequence for each investor by their respective loss in wealth equivalent. We show that significant losses can arise when investors are diverse in their risk attitude. We also show that an investor with a low degree of risk aversion, like the logarithmic or the square root investor, often applied in portfolio choice models, can either inflict or be subject to severe losses when being forced to participate in such a common investment pool. |
| doi_str_mv | 10.1007/s10436-016-0279-3 |
| format | Article |
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| ispartof | Annals of finance, 2016-05, Vol.12 (2), p.221-243 |
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| language | eng |
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| source | Business Source Complete; Springer Nature - Complete Springer Journals |
| subjects | Asset allocation Consumption Defined contribution plans Economic Theory/Quantitative Economics/Mathematical Methods Economics and Finance Equilibrium Finance Investment policy Investors Macroeconomics/Monetary Economics//Financial Economics Pareto optimum Pension funds Pension plans Portfolio management Quantitative Finance Research Article Risk aversion Studies Utility functions |
| title | How suboptimal are linear sharing rules? |
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