Finance Papers

Document Type

Book Chapter

Date of this Version


Publication Source

The Oxford Handbook of Quantitative Asset Management




The article addresses the investment problem of a pension fund in which a centralized decision maker, the Chief Investment Officer (CIO), employs multiple asset managers to implement investment strategies in separate asset classes. The investment management division of pension funds is typically structured around traditional asset classes such as equities, fixed income, and alternative investments. The asset allocation decisions are made in at least two stages. Firstly, the CIO allocates capital to the different asset classes, each managed by a different asset manager. Secondly, each manager decides how to allocate the funds made available to him, that is, to the assets within his class. The CIO of the fund therefore faces a tradeoff between the benefits of decentralization, driven by the market timing and stock selection skills of the managers, and the costs of delegation and decentralization. The optimal portfolio of the asset managers can be decomposed into two components. The first component is the standard myopic demand that optimally exploits the risk-return trade-off. The second component minimizes the instantaneous return variance and is therefore labeled the minimum-variance portfolio. The minimum variance portfolio substitutes for the riskless asset in the optimal portfolio of the asset manager. The two components are then weighted by the risk attitude of the asset manager to arrive at the optimal portfolio.

Copyright/Permission Statement

This material was originally published in The Oxford Handbook of Quantitative Asset Management by Jules H. van Binsbergen, Michael W. Brandt, and Ralph S. J. Koijen, edited by Bernd Scherer and Kenneth Winston (eds) , and has been reproduced by permission of Oxford University Press and For permission to reuse this material, please visit


At the time of publication, author Jules H. van Binsbergen was affiliated with the Kellogg School of Management, Northwestern University and Stanford Graduate School of Business. Currently , he is a faculty member in the Finance Department of the Wharton School at the University of Pennsylvania.


investment management, standard myopic demand, minimum variance portfolio, riskless asset, optimal portfolio, pension funds



Date Posted: 27 November 2017