Optimal investment with minimum performance constraints

We consider the portfolio problem of an investor whose wealth is constrained to be at least as large as that generated by investment in a stochastic benchmark portfolio. Using standard option pricing results, the optimal portfolio policy of a HARA-utility investor is derived explicitly. This policy...

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Bibliographic Details
Published inJournal of economic dynamics & control Vol. 25; no. 10; pp. 1629 - 1645
Main Author Tepla, Lucie
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.10.2001
Elsevier
Elsevier Sequoia S.A
SeriesJournal of Economic Dynamics and Control
Subjects
Benchmarks
Econometric models
Economic theory
Investment
Minimum wealth constraint
Portfolio choice
Portfolio investments
Portfolio selection
Restriction
Stochastic benchmark
Stochastic models
Stochastic processes
Studies
Wealth
Portfolio choice
Minimum wealth constraint
Stochastic benchmark
G11
C61
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Summary:We consider the portfolio problem of an investor whose wealth is constrained to be at least as large as that generated by investment in a stochastic benchmark portfolio. Using standard option pricing results, the optimal portfolio policy of a HARA-utility investor is derived explicitly. This policy is shown to be equivalent, at any point in time, to the investor's optimal unconstrained policy when he has contracted to paying out a proportion of the value of the benchmark portfolio at the terminal date. This proportion, which lies between zero and one, is smaller the more likely it is that the investor will strictly outperform the benchmark over the investment horizon.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0165-1889
1879-1743
DOI:10.1016/S0165-1889(99)00066-4