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DISCUSSION PAPER PI-0403

Quantifying the Costs of Investment Limits for Chilean Pension Funds

Solange M. Berstein and Romulo A. Chumacero

ABSTRACT

Since its creation in 1981, Pension Fund Administrators in Chile were not free
to choose optimal investment portfolios because of a stringent regulation on
investment limits. The diagnosis implicit with the imposition of limits was that the
Chilean capital market was not deep and that there was an important demand
for funds to finance the expansion of the productive sector. As this regulation
entails an inefficient combination of risk and return, this paper quantifies its costs.