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Optimal Consumption and Portfolio Decisions with Partially Observed Real PricesAlain BensoussanUniversity of Texas, Dallas Director, International Center for Decision and Risk Analysis (ICDRiA); The Hong Kong Polytechnic University; Ajou University - Graduate Dept of Financial Engineering Jussi KeppoNUS Business School, National University of Singapore Suresh SethiUniversity of Texas at Dallas - Naveen Jindal School of Management 2007-09 Mathematical Finance, Vol. 19, Issue 2, pp. 215-236, April 2009 Abstract: 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: 22 Accepted Paper SeriesDate posted: April 27, 2009Suggested CitationContact Information
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