COMPARISON OF MEAN VARIANCE LIKE STRATEGIES FOR OPTIMAL ASSET ALLOCATION PROBLEMS

J. Wang () and P. A. Forsyth ()
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J. Wang: David R. Cheriton School of Computer Science, University of Waterloo, Waterloo ON, N2L 3G1, Canada
P. A. Forsyth: David R. Cheriton School of Computer Science, University of Waterloo, Waterloo ON, N2L 3G1, Canada

International Journal of Theoretical and Applied Finance (IJTAF), 2012, vol. 15, issue 02, 1-32

Abstract: We determine the optimal dynamic investment policy for a mean quadratic variation objective function by numerical solution of a nonlinear Hamilton-Jacobi-Bellman (HJB) partial differential equation (PDE). We compare the efficient frontiers and optimal investment policies for three mean variance like strategies: pre-commitment mean variance, time-consistent mean variance, and mean quadratic variation, assuming realistic investment constraints (e.g. no bankruptcy, finite shorting, borrowing). When the investment policy is constrained, the efficient frontiers for all three objective functions are similar, but the optimal policies are quite different.

Keywords: Mean quadratic variation investment policy; mean variance asset allocation; HJB equation; optimal control (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (8)

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DOI: 10.1142/S0219024912500148

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