cicyt UNIZAR
Full-text links:

Download:

Current browse context:

q-fin.PM

Change to browse by:

References & Citations

Bookmark

(what is this?)
CiteULike logo BibSonomy logo Mendeley logo del.icio.us logo Digg logo Reddit logo ScienceWISE logo

Quantitative Finance > Portfolio Management

Title: Outperformance and Tracking: Dynamic Asset Allocation for Active and Passive Portfolio Management

Abstract: Portfolio management problems are often divided into two types: active and passive, where the objective is to outperform and track a preselected benchmark, respectively. Here, we formulate and solve a dynamic asset allocation problem that combines these two objectives in a unified framework. We look to maximize the expected growth rate differential between the wealth of the investor's portfolio and that of a performance benchmark while penalizing risk-weighted deviations from a given tracking portfolio. Using stochastic control techniques, we provide explicit closed-form expressions for the optimal allocation and we show how the optimal strategy can be related to the growth optimal portfolio. The admissible benchmarks encompass the class of functionally generated portfolios (FGPs), which include the market portfolio, as the only requirement is that they depend only on the prevailing asset values. The passive component of the problem allows the investor to leverage the relative arbitrage properties of certain FGPs and achieve outperformance in a risk-adjusted sense without requiring the difficult task of estimating of asset growth rates. Finally, some numerical experiments are presented to illustrate the risk-reward profile of the optimal allocation.
Comments: Originally posted Jan 31 2017 on SSRN at this http URL
Subjects: Portfolio Management (q-fin.PM)
Cite as: arXiv:1803.05819 [q-fin.PM]
  (or arXiv:1803.05819v2 [q-fin.PM] for this version)

Submission history

From: Ali Al-Aradi [view email]
[v1] Thu, 15 Mar 2018 15:50:42 GMT (740kb,D)
[v2] Fri, 16 Mar 2018 14:11:24 GMT (740kb,D)