Performance Measurement under Asymmetric Information and Investment Constraints

The fact that investment policies are often restricted appears to have been neglected in the performance measurement literature. This paper, using a standard information model, shows how the introduction of constraints on the proportion of assets to be invested in the market affects the expected portfolio returns and the value of a portfolio manager's performance. The results are related to the classical Treynor and Mazuy (1966) conjectures about characteristic lines.