Optimal Consumption and Portfolio Decisions with Partially Observed Real Prices
University of Texas, Dallas Director, International Center for Decision and Risk Analysis (ICDRiA); The Hong Kong Polytechnic University; Ajou University - Graduate Dept of Financial Engineering
NUS Business School, National University of Singapore
University of Texas at Dallas - Naveen Jindal School of Management
Mathematical Finance, Vol. 19, Issue 2, pp. 215-236, April 2009
We consider optimal consumption and portfolio investment problems of an investor who is interested in maximizing his utilities from consumption and terminal wealth subject to a random inflation in the consumption basket price over time. We consider two cases: (i) when the investor observes the basket price and (ii) when he receives only noisy observations on the basket price. We derive the optimal policies and show that a modified Mutual Fund Theorem consisting of three funds holds in both cases. The compositions of the funds in the two cases are the same, but in general the investor's allocations of his wealth into these funds will differ. However, in the particular case when the investor has constant relative risk-aversion (CRRA) utility, his optimal investment allocations into these funds are also the same in both cases.
Number of Pages in PDF File: 22Accepted Paper Series
Date posted: April 27, 2009
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