Optimal portfolio strategies benchmarking the stock market

A. Gabih, W. Grecksch, M. Richter and R. Wunderlich ()

Mathematical Methods of Operations Research, 2006, vol. 64, issue 2, 225 pages

Abstract: The paper investigates the impact of adding a shortfall risk constraint to the problem of a portfolio manager who wishes to maximize his utility from the portfolios terminal wealth. Since portfolio managers are often evaluated relative to benchmarks which depend on the stock market we capture risk management considerations by allowing a prespecified risk of falling short such a benchmark. This risk is measured by the expected loss in utility. Using the Black–Scholes model of a complete financial market and applying martingale methods, explicit analytic expressions for the optimal terminal wealth and the optimal portfolio strategies are given. Numerical examples illustrate the analytic results. Copyright Springer-Verlag 2006

Keywords: Portfolio optimization; Shortfall risk constraints; Optimal strategy; Martingale method; Stochastic optimal control (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:spr:mathme:v:64:y:2006:i:2:p:211-225

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DOI: 10.1007/s00186-006-0091-3

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