Abstract Many financial institutions employ outside portfolio managers to manage part or all of their investable assets. It is well recognized that outside portfolio managers are unwilling to share security information with each other or with the centralized decision maker and this in general will lead to sub-optimal portfolios. In this paper, we derive an implementable set of rules under which a central decision maker can make optimal decisions without requiring decentralized decision makers to reveal estimates of security returns. Furthermore, we derive conditions under which these rules hold and when they do not hold.

An important body of literature in Financial Economics accepts bond ratings as a sufficient metric for determining homogeneous groups of bonds for estimating either risk-neutral probabilities or spot rate curves for valuing corporate bonds. In this paper we examine Moody’s and Standard & Poors ratings of corporate bonds and show they are not sufficient metrics for determining spot rate curves and pricing relationships. We investigate several bond characteristics that have been hypothesized as affecting bond prices and show that from among this set of measures default risk, liquidity, tax liability, recovery rate and bond age leads to better estimates of spot curves and for pricing bonds. This has implications for what factors affect corporate bond prices as well as valuing individual bonds.

ABSTRACT S&P 500 index funds represent one of the simplest vehicles for examining rational behavior. They hold virtually the same securities, yet their returns differ by more than 2 percent per year. Although the relative returns of alternative S&P 500 funds are easily predictable, the relationship between cash flows and performance is weaker than rational behavior would lead us to expect. We show that selecting funds based on low expenses or high past returns outperforms the portfolio of index funds selected by investors. Our results exemplify the fact that, in a market where arbitrage is not possible, dominated products can prosper.