Semimartingale Theory of Monotone Mean-Variance Portfolio Allocation

Abstract

We study dynamic optimal portfolio allocation for monotone mean-variance preferences in a general semimartingale model. Armed with new results in this area we revisit the work of Cui, Li, Wang and Zhu (2012, MAFI) and fully characterize the circumstances under which one can set aside a non-negative cash flow while simultaneously improving the mean-variance efficiency of the left-over wealth. The paper analyzes, for the first time, the monotone hull of the Sharpe ratio and highlights its relevance to the problem at hand.

Keywords: monotone mean–variance, monotone Sharpe ratio, free cash-flow stream

JEL Classification: G11, C61