We employ perturbation analysis technique to study multi-asset portfolio optimisation with transaction cost. We allow for correlations in risky assets and obtain optimal trading methods for general utility functions. Our analytical results are supported by numerical simulations in the context of the Long Term Growth Model.
We extend Relative Robust Portfolio Optimisation models to allow portfolios to optimise their distance to a set of benchmarks. Portfolio managers are also given the option of computing regret in a way which is more in line with market practices than
other approaches suggested in the literature. In addition, they are given the choice of simply adding an extra constraint to their optimisation problem instead of outright changing the objective function, as is commonly suggested in the literature. We illustrate the benefits of this approach by applying it to equity portfolios in a variety of regions.
We consider an investor with constant absolute risk aversion who trades a risky asset with general Ito dynamics, in the presence of small proportional transaction costs. Kallsen and Muhle-Karbe (2012) formally derived the leading-order optimal tradin
g policy and the associated welfare impact of transaction costs. In the present paper, we carry out a convex duality approach facilitated by the concept of shadow price processes in order to verify the main results of Kallsen and Muhle-Karbe under well-defined regularity conditions.
Portfolio management problems are often divided into two types: active and passive, where the objective is to outperform and track a preselected benchmark, respectively. Here, we formulate and solve a dynamic asset allocation problem that combines th
ese two objectives in a unified framework. We look to maximize the expected growth rate differential between the wealth of the investors portfolio and that of a performance benchmark while penalizing risk-weighted deviations from a given tracking portfolio. Using stochastic control techniques, we provide explicit closed-form expressions for the optimal allocation and we show how the optimal strategy can be related to the growth optimal portfolio. The admissible benchmarks encompass the class of functionally generated portfolios (FGPs), which include the market portfolio, as the only requirement is that they depend only on the prevailing asset values. Finally, some numerical experiments are presented to illustrate the risk-reward profile of the optimal allocation.
In this paper, we are concerned with the optimization of a dynamic investment portfolio when the securities which follow a multivariate Merton model with dependent jumps are periodically invested and proceed by approximating the Condition-Value-at-Ri
sk (CVaR) by comonotonic bounds and maximize the expected terminal wealth. Numerical studies as well as applications of our results to real datasets are also provided.
We show how to reduce the problem of computing VaR and CVaR with Student T return distributions to evaluation of analytical functions of the moments. This allows an analysis of the risk properties of systems to be carefully attributed between choices
of risk function (e.g. VaR vs CVaR); choice of return distribution (power law tail vs Gaussian) and choice of event frequency, for risk assessment. We exploit this to provide a simple method for portfolio optimization when the asset returns follow a standard multivariate T distribution. This may be used as a semi-analytical verification tool for more general optimizers, and for practical assessment of the impact of fat tails on asset allocation for shorter time horizons.