Dynamical optimization theory of a diversified portfolio

Matteo Marsili, Sergei Maslov and Yi-Cheng Zhang

Physica A: Statistical Mechanics and its Applications, 1998, vol. 253, issue 1, 403-418

Abstract: We propose and study a simple model of dynamical redistribution of capital in a diversified portfolio. We consider a hypothetical situation of a portfolio composed of N uncorrelated stocks. Each stock price follows a multiplicative random walk with identical drift and dispersion. The rules of our model naturally give rise to power law tails in the distribution of capital fractions invested in different stocks. The exponent of this scale free distribution is calculated in both discrete and continuous time formalism. It is demonstrated that the dynamical redistribution strategy results in a larger typical growth rate of the capital than a static “buy-and-hold” strategy. In the large N limit the typical growth rate is shown to asymptotically approach that of the expectation value of the stock price. The finite dimensional variant of the model is shown to describe the partition function of directed polymers in random media.

Date: 1998
References: View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437198000752
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

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:eee:phsmap:v:253:y:1998:i:1:p:403-418

DOI: 10.1016/S0378-4371(98)00075-2

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().