A Dynamic Model of Active Portfolio Management
نویسنده
چکیده
In this paper, we develop a dynamic investment model maximizing the expected “utility” of excess return relative to a benchmark portfolio. Following the standard setting of continuous time framework for the securities market developed by Merton (1971) and others, we obtain an explicit formula for the optimal portfolio policy for a utility function ofHyperbolic Absolute Risk Aversion (HARA). Unlike the constant proportion portfolio strategies, the resulting optimal portfolio is state dependent, namely a function of time, the return on the benchmark portfolio, and the return on the investment portfolio itself. It is shown that the optimal return is equal to the return on the benchmark portfolio plus a value added return related to the growth optimum portfolio on a risk adjusted basis. As a special case, the optimal portfolio is identical to the benchmark portfolio, if the utility function is of Constant Relative Risk Aversion (CRRA).
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