Portfolio selection problem with multiple risky assets under the constant elasticity of variance model

Hui Zhao and Ximin Rong

Insurance: Mathematics and Economics, 2012, vol. 50, issue 1, 179-190

Abstract: This paper focuses on the constant elasticity of variance (CEV) model for studying the utility maximization portfolio selection problem with multiple risky assets and a risk-free asset. The Hamilton–Jacobi–Bellman (HJB) equation associated with the portfolio optimization problem is established. By applying a power transform and a variable change technique, we derive the explicit solution for the constant absolute risk aversion (CARA) utility function when the elasticity coefficient is −1 or 0. In order to obtain a general optimal strategy for all values of the elasticity coefficient, we propose a model with two risky assets and one risk-free asset and solve it under a given assumption. Furthermore, we analyze the properties of the optimal strategies and discuss the effects of market parameters on the optimal strategies. Finally, a numerical simulation is presented to illustrate the similarities and differences between the results of the two models proposed in this paper.

Keywords: Portfolio selection; CEV model; HJB equation; Utility maximization; Stochastic optimal control (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:50:y:2012:i:1:p:179-190

DOI: 10.1016/j.insmatheco.2011.10.013

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