The Contruction of Portfolios of Financial Assets: An Application of Optimal Stochastic Control

• Published in: The Control Handbook pp. 737 - 758
• Format: Book Chapter
• Language: English
• Published: United Kingdom CRC Press 2011; Taylor & Francis Group
• Subjects: Electronics engineering; ENVIRONMENTAL ENGINEERING & TECHNOLOGY; SCIENCE: GENERAL ISSUES; Log Price Process; Tangent Portfolio; Portfolio Weight Vector; Risk Free Rate; Ito’s Lemma; Sharpe Ratio; Optimal Portfolio; Pair Trading; Stochastic Differential Equation; Market Portfolio; Risk Free Asset; Linear Quadratic Regulator Problem; Problem P0; Stochastic Optimal Control; Continuous Time Model; Growth Optimal Portfolio; Risky Asset; Portfolio Weight; Continuous Time Portfolio Optimization; Asset Log Prices; Risk Free Bond; Asset Returns; Efficient Frontier; Portfolio Return; Resulting Capital Asset Pricing Model
• ISBN: 9781420073607; 1420073605
• DOI: 10.1201/b10382-42

The notions of financial engineering have their roots in disciplines that have long been part of the subject matter studied by control theorists. In particular, many of the main results in financial economics are direct applications of the use of random variables, stochastic differential and difference equations and discrete-and continuous-time stochastic control theory. Yet these results have been developed almost completely separately from the developments in the controls field with very few researchers publishing in both areas.