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- Title
PORTFOLIO SELECTION USING POWER LAW WITH EXPONENTIAL CUT-OFF UTILITY FUNCTION.
- Authors
ARIF H., Afreen; PAKKALA, T. P. M.
- Abstract
This paper considers the optimal portfolio selection problem in a multiple period setting where the investor maximizes the expected utility of the terminal wealth based on the Power law with exponential cut-off (PLEC) utility function, in a stochastic market. Optimal portfolio selection in a multi-period setting where risk preferences are allowed to change in every period is discussed. The change in the market conditions is modelled according to a Markov Chain. Dynamic programming approach is used to obtain the solution of the optimal policy and the corresponding value function is applied. The applicability of PLEC utility is demonstrated here, in order to obtain an optimal policy which depends on the wealth invested and also on the period of investment along with the state of the market. The focus is on using the different PLEC utility functions for representing various investors of the market.
- Subjects
PORTFOLIO management (Investments); UTILITY functions; INVESTORS; POWER law (Mathematics); DYNAMIC programming; MARKOV processes; RISK assessment
- Publication
Economic Computation & Economic Cybernetics Studies & Research, 2015, Vol 49, Issue 2, p134
- ISSN
0424-267X
- Publication type
Article