Optimal Investment to Minimize the Probability of Drawdown
15 Pages Posted: 18 Feb 2016
Date Written: December 11, 2015
We determine the optimal investment strategy in a Black-Scholes financial market to minimize the so-called probability of drawdown, namely, the probability that the value of an investment portfolio reaches some fixed proportion of its maximum value to date. We assume that the portfolio is subject to a payout that is a deterministic function of its value, as might be the case for an endowment fund paying at a specified rate, for example, at a constant rate or at a rate that is proportional to the fund's value.
Keywords: Optimal investment, stochastic optimal control, probability of drawdown
JEL Classification: C61, G02, G11
Suggested Citation: Suggested Citation