Annals of Finance

, 6:83 | Cite as

Beliefs regarding fundamental value and optimal investing

  • Bradford Cornell
  • Jakša Cvitanić
  • Levon Goukasian
Research Article
First Online:
Received:
Accepted:

Abstract

Standard optimal portfolio selection models take no account of the special information that active investors believe they possess. For example, active investors who believe they can place bounds on the price of a security will want to use that information when assessing risk and expected return in order to construct an optimal portfolio. In this paper, we use two continuous-time models to analyze how placing boundaries on the price of a stock affects assessed risk, expected returns, and the optimal holdings of an active investor, and how those vary as a function of the relation between the stock price and the boundaries. In particular, the optimal strategy takes significant long/short positions as the price nears its lower/upper boundary.

Keywords

Investor beliefs Mispricing Optimal portfolios Range reversion Risk premium 

JEL Classification

G11 
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Copyright information

© Springer-Verlag 2009

Authors and Affiliations

  • Bradford Cornell
    • 1
  • Jakša Cvitanić
    • 1
  • Levon Goukasian
    • 2
  1. 1.Caltech, Humanities and Social SciencesPasadenaUSA
  2. 2.Business DivisionPepperdine UniversityMalibuUSA

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