Dynamic optimal portfolio with maximum absolute deviation model

Authors:
Mei Yu;Shouyang Wang
Affiliations:
Research Center of Applied Finance, School of Finance and Banking, University of International Business and Economics, Beijing, China 100029;Institute of Mathematics and Systems Science, Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing, China 100190
Venue:
Journal of Global Optimization
Year:
2012

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Abstract

In this paper, a new dynamic portfolio selection model is established. Different from original consideration that risk is defined as the variance of terminal wealth, the total risk is defined as the average of the sum of maximum absolute deviation of all assets in all periods. At the same time, noticing that the risk during the period is so high that the investor may go bankrupt, a maximum risk level is given to control risk in every period. By introducing an auxiliary problem, the optimal strategy is deduced via the dynamic programming method.