Asset allocation and derivatives
نویسندگان
چکیده
The fact that derivative securities are equivalent to specific dynamic trading strategies in complete markets suggests the possibility of constructing buy-and-hold portfolios of options that mimic certain dynamic investment policies, e.g. asset-allocation rules. We explore this possibility by solving the following problem: given an optimal dynamic investment policy, find a set of options at the start of the investment horizon which will come closest to the optimal dynamic investment policy. We solve this problem for several combinations of preferences, return dynamics and optimality criteria, and show that under certain conditions, a portfolio consisting of just a few options is an excellent substitute for considerably more complex dynamic investment policies.
منابع مشابه
Cumulative Prospect Theory and Mean Variance Analysis. A Rigorous Comparison
We compare asset allocations derived for cumulative prospect theory (CPT) based on two different methods: Maximizing CPT along the mean–variance efficient frontier and maximizing it without that restriction. We find that with normally distributed returns the difference is negligible. However, using standard asset allocation data of pension funds the difference is considerable. Moreover, with de...
متن کاملRisk allocation: The Double Face of Financial Derivatives
For the past two decades, derivatives provided the core financial innovation for riskmanagement and risk-sharing activities. However, in the aftermath of the 2007-2008 crisis, derivatives have started received, partly for good reason, an increasingly bad press. The main purpose of this paper is to lay the foundations for a theoretical framework in which systemic risk is centrally involved in th...
متن کاملExpected Utility Asset Allocation
Many institutional investors periodically adopt an asset allocation policy that specifies target percentages of value for each of several asset classes. Typically a policy is set by a fund’s board after evaluating the implications of a set of alternative policies. The staff is then instructed to implement the policy, usually by maintaining the actual allocation to each asset class within a spec...
متن کاملInsurer Optimal Asset Allocation in a Small and Closed Economy: The Case of Iran’s Social Security Organization
We seek to determine the optimal amount of the insurer’s investment in all types of assets for a small and closed economy. The goal is to detect the implications and contributions the risk seeker and risk aversion insurer commonly make and the effectiveness in the investment decision. Also, finding the optimum portfolio for each is the main goal of the present study. To this end, we adopted the...
متن کاملDerivatives Performance Attribution
This paper shows how to decompose the dollar profit earned from an option into two basic components: ¶ mispricing of the option relative to the asset at the time of purchase, and · profit from subsequent fortuitous changes or mispricing of the underlying asset. This separation hinges on measuring the “true relative value” of the option from its realized payoff. The payoff from any one option ha...
متن کامل