Along but beyond mean-variance: Utility maximization in a semimartingale model

Heli Huhtala

No 5/2008, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: It is well known that under certain assumptions the strategy of an investor maximizing his expected utility coincides with the mean-variance optimal strategy. In this paper we show that the two strategies are not equal in general and find the connection between a utility maximizing and a mean-variance optimal strategy in a continuous semimartingale model. That is done by showing that the utility maximizing strategy of a CARA investor can be expressed in terms of expectation and the expected quadratic variation of the underlying price process. It coincides with the mean-variance optimal strategy if the underlying price process is a local martingale.

Keywords: mean-variance portfolios; utility maximization; dynamic portfolio selection; quadratic variation (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2008_005

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