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Portfolio Selection in a Lognormal Market When the Investor Has a Power Utility Function

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  • Ohlson, J. A.
  • Ziemba, W. T.

Abstract

Multiasset portfolio selection models stated in terms of the expected utility criterion generally require the evaluation of multiple integrals. This reality has severely hindered attempts towards the development of computation methods to determine optimal portfolio allocations when there are a large number of assets. Aside from special cases, expected utility is not convergent into a simple closed form; the complexity from the point of view of computation is then perhaps most easily appreciated if one realizes that every iteration in a nonlinear program demands the estimation of several integrals (see Ziemba [23] for details). Such calculations are extremely costly when the number of assets is large. It is, consequently, of interest to approximate the expected utility function by a function which is easier to optimize over the set of feasible portfolios.

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  • Ohlson, J. A. & Ziemba, W. T., 1976. "Portfolio Selection in a Lognormal Market When the Investor Has a Power Utility Function," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(1), pages 57-71, March.
    • Handle: RePEc:cup:jfinqa:v:11:y:1976:i:01:p:57-71_02
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    Cited by:

    1. Bengtsson, Christoffer, 2003. "The Impact of Estimation Error on Portfolio Selection for Investors with Constant Relative Risk Aversion," Working Papers 2003:17, Lund University, Department of Economics, revised 29 Apr 2004.
    2. David S. Jones & V. Vance Roley, 1981. "Bliss Points in Mean-Variance Portfolio Models," NBER Technical Working Papers 0019, National Bureau of Economic Research, Inc.

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