The source of investment performance is estimation error.Estimation error leads investors to believe securities are mispriced when they are not. They respond by undiversifying to increase their portfolios' estimated expected return. Since they are responding to estimation error, their actual...

Ferguson and Leistikow [(1997). Journal of Financial Engineering 6, 1–30] (FLa) was the first long-run risk-neutral analysis of the performance volatility incentives created by investment management fee structures. This paper extends FLa in six ways. It allows the portfolio's value to change,...