Consumption-Portfolio Policies: An Inverse Optimal Problem

Working Paper Alfred P. Sloan School of Management Consumption-portfolio Policies: an Inverse Optimal Problem Consumption-portfolio Policies: an Inverse Optimal Problem Consumption-portfolio Policies: an Inverse Optimal Problem"

We study a problem that is the "inverse" of Merton (1971). For a given consumption-portfolio policy, we provide necessary and sufficient conditions for it to be optimal for "some" agent with an increasing, strictly concave, time-additive, and state independent utility function when the risky asset price follows a general diffusion process. These conditions involve a set of consistency and state...

Non-addictive habits: optimal consumption-portfolio policies

We formulate a model of preferences with non-addictive habits, where consumption is required to be non-negative at all times, but is allowed to fall below a “standard of living” index that aggregates past consumption. In this context we study the consumption-portfolio choice problem taking account of the non-negativity constraint on consumption, and provide a constructive proof for the existenc...

Optimal allocation-consumption problem for a portfolio with an illiquid asset

Inverse portfolio problem with mean-deviation model

A Markowitz-type portfolio selection problem is to minimize a deviation measure of portfolio rate of return subject to constraints on portfolio budget and on desired expected return. In this context, the inverse portfolio problem is finding a deviation measure by observing the optimal mean-deviation portfolio that an investor holds. Necessary and sufficient conditions for the existence of such ...

Inverse portfolio problem with coherent risk measures

In general, a portfolio problem minimizes risk (or negative utility) of a portfolio of financial assets with respect to portfolio weights subject to a budget constraint. The inverse portfolio problem then arises when an investor assumes that his/her risk preferences have a numerical representation in the form of a certain class of functionals, e.g. in the form of expected utility, coherent risk...