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A Numerical Solution of Optimal Portfolio Selection Problem with General Utility Functions

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posted on 2024-11-16, 04:08 authored by Guiyuan Ma, Song-Ping ZhuSong-Ping Zhu, Boda Kang
In this paper, we adopt a monotone numerical scheme to solve the Hamilton-Jacobi-Bellman equation arising from the optimal portfolio selection problem with general utility functions. To explore the relationship between the relative risk aversion and optimal investment strategy, three different examples are presented with a constant relative risk aversion (CRRA) utility, an increasing relative risk aversion (IRRA) utility and a decreasing relative risk aversion (DRRA) utility, respectively. Our numerical results suggest that non-CRRA investors should adjust the portfolio according to both wealth and time positions. More specifically, both IRRA and DRRA investors should reduce their allocation to the risky asset as time approaches the investment horizon, which is consistent with the life-cycle investment advice. On the other hand, as the wealth increases, IRRA investors should decrease their allocation to the risky asset, while DRRA investors should behave the other way around.

Funding

The effect of bans on short selling: a comprehensive study

Australian Research Council

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Liquidity in financial markets

Australian Research Council

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History

Citation

Ma, G., Zhu, S. & Kang, B. (2019). A Numerical Solution of Optimal Portfolio Selection Problem with General Utility Functions. Computational Economics, Online First 1-25.

Journal title

Computational Economics

Volume

55

Issue

3

Pagination

957-981

Language

English

RIS ID

139928

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