Continuous-Time Mean-Variance Portfolio Selection: A Stochastic LQ Framework

Continuous-Time Mean-Variance Portfolio Selection: A Stochastic LQ Framework This paper is concerned with a continuous-time mean-variance portfolio selection model that is formulated as a bicriteria optimization problem. The objective is to maximize the expected terminal return and minimize the variance of the terminal wealth. By putting weights on the two criteria one obtains a single objective stochastic control problem which is however not in the standard form due to the variance term involved. It is shown that this nonstandard problem can be ``embedded'' into a class of auxiliary stochastic linear-quadratic (LQ) problems. The stochastic LQ control model proves to be an appropriate and effective framework to study the mean-variance problem in light of the recent development on general stochastic LQ problems with indefinite control weighting matrices. This gives rise to the efficient frontier in a closed form for the original portfolio selection problem. Applied Mathematics and Optimization Springer Journals

Continuous-Time Mean-Variance Portfolio Selection: A Stochastic LQ Framework

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Copyright © Inc. by 2000 Springer-Verlag New York
Mathematics; Calculus of Variations and Optimal Control; Optimization; Systems Theory, Control; Theoretical, Mathematical and Computational Physics; Mathematical Methods in Physics; Numerical and Computational Physics, Simulation
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