Discrete and continuous time dynamic mean-variance analysis

Ariane Reiss

No 168, Tübinger Diskussionsbeiträge from University of Tübingen, School of Business and Economics

Abstract: Contrary to static mean-variance analysis, very few papers have dealt with dynamic mean-variance analysis. Here, the mean-variance efficient self-financing portfolio strategy is derived for n risky assets in discrete and continuous time. In the discrete setting, the resulting portfolio is mean-variance efficient in a dynamic sense. It is shown that the optimal strategy for n risky assets may be dominated if the expected terminal wealth is constrained to exactly attain a certain goal instead of exceeding the goal. The optimal strategy for n risky assets can be decomposed into a locally mean-variance efficient strategy and a strategy that ensures optimum diversification across time. In continuous time, a dynamically mean-variance efficient portfolio is infeasible due to the constraint on the expected level of terminal wealth. A modified problem where mean and variance are determined at t=0 was solved by Richardson (1989). The solution is discussed and generalized for a market with n risky assets. Moreover, a dynamically optimal strategy is presented for the objective of minimizing the expected quadratic deviation from a certain target level subject to a given mean. This strategy equals that of the first objective. The strategy can be reinterpreted as a two-fund strategy in the growth optimum portfolio and the risk-free asset.

Keywords: Dynamic Optimization; Growth Optimum Portfolio; Mean-Variance-Efficiency; Minimum Deviation; Portfolio Selection; Two-Fund Theorem (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Date: 1999
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/47531/1/270478396.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuedps:168

Access Statistics for this paper

More papers in Tübinger Diskussionsbeiträge from University of Tübingen, School of Business and Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().