Portfolio optimization: not necessarily concave utility and constraints on wealth and allocation

Marcos Escobar-Anel (), Michel Kschonnek () and Rudi Zagst ()
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Marcos Escobar-Anel: Western University
Michel Kschonnek: Technical University of Munich
Rudi Zagst: Technical University of Munich
Authors registered in the RePEc Author Service: Marcos Escobar Anel ()

Mathematical Methods of Operations Research, 2022, vol. 95, issue 1, No 4, 140 pages

Abstract: Abstract We consider a portfolio optimization problem for a utility maximizing investor who is simultaneously restricted by convex constraints on portfolio allocation and upper and lower bounds on terminal wealth. After introducing a capped version of the Legendre–Fenchel-transformation, we use it to suitably extend the well-known auxiliary market framework for convex allocation constraints to derive equivalent optimality conditions for our setting with additional bounds on terminal wealth. The considered utility does not have to be strictly concave or smooth, as long as it can be concavified.

Keywords: Dynamic portfolio optimization; Allocation constraints; Terminal wealth constraints; Utility maximization; HJB; Concavification; 91G10; 91B70; 49L20 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s00186-022-00772-2

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