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- Title
A Monte Carlo Method for Optimal Portfolios.
- Authors
DETEMPLE, JÉRÔME B.; GARCIA, RENÉ; RINDISBACHER, MARCEL
- Abstract
This paper proposes a new simulation-based approach for optimal portfolio allocation in realistic environments with complex dynamics for the state variables and large numbers of factors and assets. A first illustration involves a choice between equity and cash with nonlinear interest rate and market price of risk dynamics. Intertemporal hedging demands significantly increase the demand for stocks and exhibit low volatility. We then analyze settings where stock returns are also predicted by dividend yields and where investors have wealth-dependent relative risk aversion. Large-scale problems with many assets, including the Nasdaq, SP500, bonds, and cash, are also examined.
- Subjects
ASSET allocation; PORTFOLIO management (Investments); RATE of return; MONTE Carlo method; RATE of return on stocks; DIVIDEND yield; MARKET volatility; RISK aversion; HEDGING (Finance); MARKET timing; MANAGEMENT
- Publication
Journal of Finance (Wiley-Blackwell), 2003, Vol 58, Issue 1, p401
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/1540-6261.00529