We present a general equilibrium model in which heterogeneous investors choose among bonds, stocks, and an Index Fund holding the market portfolio. We show that, under standard assumptions, an equilibrium exists. We then derive predictions for equilibrium asset prices, investor behavior, and...

We analyze the implications of linking the compensation of fund managers to the return of their portfolio relative to that of a benchmark - a common solution to the agency problem in delegated portfolio management. In the presence of such relative-performance-based objectives, investors have...

We propose a genuinely internal approach to project valuation and decision based on the average Return On Investment (ROI), obtained as the ratio of total operating profit (NOPAT) to total invested capital or, equivalently, as the ratio of net cash flow to total invested capital. The approach...

Active fee is the ratio between the excess cost of active management over the index alternative and the fund's activity level. We suggest a simple model that explains active capital allocations in the presence of time-varying active fee. We show that investors respond in accordance with the...

Following the Pension Protection Act of 2006, there was a sharp increase in the use of TDFs as default investment options in defined contribution retirement plans. We document large differences in realized TDF returns and risk profiles, even for funds with the same target retirement date. Using...