Abstract
This chapter derives and extends a range of classical results from portfolio optimization and derivative pricing in incomplete markets in the context of a CFM. First, we consider the question of how wealth should be optimally transferred into the future given the preferences of an investor. This is a central question in economics and finance and leads into the area of portfolio optimization. We shall advocate the GOP as the best long term investment. This is consistent with views formulated in Latané (1959), Breiman (1961), Hakansson (1971) and Thorp (1972).
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References
Breiman, L. (1961). Optimal gambling systems for favorable games, Proceedings of the Fourth Berkeley Symposium on Mathematical Statistics and Probability, Vol. I, pp. 65–78.
Hakansson, N. H. (1971). Multi-period mean-variance analysis: towards a general theory of portfolio choice, J. Finance 26: 857–884.
Latané, H. (1959). Criteria for choice among risky ventures, J. Political Economy 38: 145–155.
Thorp, E. O. (1972). Portfolio choice and the Kelly criterion, Proceedings of the 1971 Business and Economics Section of the American Statistical Association, Vol. 21, pp. 5–224.
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© 2006 Springer-Verlag Berlin Heidelberg
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Platen, E., Heath, D. (2006). Portfolio Optimization. In: A Benchmark Approach to Quantitative Finance. Springer Finance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-47856-0_11
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DOI: https://doi.org/10.1007/978-3-540-47856-0_11
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-540-26212-1
Online ISBN: 978-3-540-47856-0
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