| Abstract: | This article studies the contracting problem between an individualinvestor and a professional portfolio manager in a continuous-timeprincipal-agent framework. Optimal contracts are obtained inclosed form. These contracts are of a symmetric form and suggestthat a portfolio manager should receive a fixed fee, a fractionof the total assets under management, plus a bonus or a penaltydepending upon the portfolio's excess return relative to a benchmarkportfolio. The appropriate benchmark portfolio is an activeindex that contains risky assets where the number of sharesinvested in each asset can vary over time, rather than a passiveindex in which the number of shares invested in each asset remainsconstant over time. |
