Economics at your fingertips  

Portfolio Optimization under Correlation Constraint

Aditya Maheshwari () and Traian A. Pirvu ()
Additional contact information
Aditya Maheshwari: Bank of America Securities, New York, NY 10036, USA
Traian A. Pirvu: Department of Mathematics and Statistics, McMaster University, 1280 Main Street West, Hamilton, ON L8S 4K1, Canada

Risks, 2020, vol. 8, issue 1, 1-1

Abstract: We consider the problem of portfolio optimization with a correlation constraint. The framework is the multi-period stochastic financial market setting with one tradable stock, stochastic income, and a non-tradable index. The correlation constraint is imposed on the portfolio and the non-tradable index at some benchmark time horizon. The goal is to maximize a portofolio’s expected exponential utility subject to the correlation constraint. Two types of optimal portfolio strategies are considered: the subgame perfect and the precommitment ones. We find analytical expressions for the constrained subgame perfect (CSGP) and the constrained precommitment (CPC) portfolio strategies. Both these portfolio strategies yield significantly lower risk when compared to the unconstrained setting, at the cost of a small utility loss. The performance of the CSGP and CPC portfolio strategies is similar.

Keywords: portfolio optimization; correlation constraints (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 M2 M4 K2 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf) (text/html)

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:

Access Statistics for this article

Risks is currently edited by Prof. Dr. J. David Cummins

More articles in Risks from MDPI, Open Access Journal
Bibliographic data for series maintained by XML Conversion Team ().

Page updated 2021-01-05
Handle: RePEc:gam:jrisks:v:8:y:2020:i:1:p:15-:d:317375