Portfolio optimization under correlation constraint

Artikel

We consider the problem of portfolio optimization with a correlation constraint. The framework is the multi-period stochastic financial market setting with one tradable stock, stochastic income, and a non-tradable index. The correlation constraint is imposed on the portfolio and the non-tradable index at some benchmark time horizon. The goal is to maximize a portofolio's expected exponential utility subject to the correlation constraint. Two types of optimal portfolio strategies are considered: the subgame perfect and the precommitment ones. We find analytical expressions for the constrained subgame perfect (CSGP) and the constrained precommitment (CPC) portfolio strategies. Both these portfolio strategies yield significantly lower risk when compared to the unconstrained setting, at the cost of a small utility loss. The performance of the CSGP and CPC portfolio strategies is similar.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Risks ; ISSN: 2227-9091 ; Volume: 8 ; Year: 2020 ; Issue: 1 ; Pages: 1-18 ; Basel: MDPI

Classification and Topics

• Classification: Wirtschaft
• Subject: 91B06 ; 60H30 ; portfolio optimization ; correlation constraints

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Maheshwari, Aditya ; Pirvu, Traian A.
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2020

Further information

• DOI: doi:10.3390/risks8010015
• Handle: http://hdl.handle.net/10419/257970
• Last update: 10.03.2025, 11:42 AM CET