Optimal Portfolios Under Bounded Shortfall Risk and Partial Information

Ralf Wunderlich (), Jörn Sass () and Abdelali Gabih ()
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Ralf Wunderlich: Zwickau University of Applied Sciences
Jörn Sass: Austrian Academy of Sciences
Abdelali Gabih: Leipzig University

A chapter in Operations Research Proceedings 2006, 2007, pp 581-586 from Springer

Abstract: Abstract This paper considers the optimal selection of portfolios for utility maximizing investors under a shortfall risk constraint for a financial market model with partial information on the drift parameter. It is known that without risk constraint the distribution of the optimal terminal wealth often is quite skew. In spite of its maximum expected utility there are high probabilities for values of the terminal wealth falling short a prescribed benchmark. This is an undesirable and unacceptable property e.g. from the viewpoint of a pension fund manager. While imposing a strict restriction to portfolio values above a benchmark leads to considerable decrease in the portfolio’s expected utility, it seems to be reasonable to allow shortfall and to restrict only some shortfall risk measure.

Keywords: Hide Markov Model; Portfolio Optimization; Expected Loss; Continuous Time Markov Chain; Terminal Wealth (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1007/978-3-540-69995-8_92

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