Some investment management contracts give the portfolio manager a bonus proportional to the amount by which a

Question:

Some investment management contracts give the manager a bonus proportional to the amount by which a return exceeds a specified threshold.
a. In what way is this implicit call option on the Can you think of a way in which such contracts can lead to incentive problems? For example, what happens to the value of the prospective bonus if the manager invests in high volatility stocks?
Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...