A Minimum Variance Result in Continuous Trading Portfolio Optimization

Henry R. Richardson
Additional contact information
Henry R. Richardson: United States Naval Academy, Annapolis, Maryland 21401 and Center for Naval Analyses

Management Science, 1989, vol. 35, issue 9, 1045-1055

Abstract: The problem of minimizing the variance of discounted wealth at the end of a fixed period is solved when the expectation of terminal wealth is constrained to a specified investment goal. The results are obtained in a continuous trading framework under the assumption that the funds can be exchanged between a riskless bond and a stock whose discounted price is described by a geometric Brownian motion. Transaction costs are ignored (i.e., the market is "frictionless") and unlimited borrowing is permitted at the same rate as the return on the bond. Typically the optimal trading policy under the above assumptions involves a highly leveraged investment in the stock in the early stages followed by an accumulation of the bond in the later stages. Numerical results are provided as an illustration of the theory.

Keywords: portfolio optimization; finance; stochastic control; Martingales; Hilbert space applications (search for similar items in EconPapers)
Date: 1989
References: Add references at CitEc
Citations: View citations in EconPapers (35)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.35.9.1045 (application/pdf)

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:inm:ormnsc:v:35:y:1989:i:9:p:1045-1055

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().