Premium
The Impact of Investment Constraints on Portfolio Performance Measurement: The Power Utility Function Case
Author(s) -
Gibson Rajna,
Tuchschmid Nils S.
Publication year - 1995
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1995.tb00832.x
Subject(s) - portfolio , benchmark (surveying) , investment (military) , economics , function (biology) , econometrics , portfolio investment , microeconomics , financial economics , geodesy , evolutionary biology , politics , political science , law , biology , geography
This paper examines the effect of investment constraints on performance measurement of institutionally managed funds. Assuming that these funds have a power utility function and using an optimal portfolio choice model, one can show that the Security Market Line remains a valid benchmark for these constrained funds under the perfect market assumption. Relaxing the perfect market assumption, one can prove that a non‐stationary constrained investment policy will bias traditional measures of timing ability differently across managers types. Finally, the magnitude of this bias is illustrated with a numerical example.