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Dynamic optimal capital growth with risk constraints

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  • Yong, Luo
  • Bo, Zhu
  • Yong, Tang

Abstract

In this paper, risk metrics in capital growth and drawdown as a financial risk measure were considered. Moreover, we developed a dynamic portfolio management model with constraints on the maximal drawdown. Exact optimization algorithms run into difficulties in this framework and this motivates the investigation of simulated annealing optimized algorithm to solve the problem of maximizing long term growth of simultaneous risky investment. Empirical research indicates that the approach is inspiring for this class of portfolio optimization problems.

Suggested Citation

  • Yong, Luo & Bo, Zhu & Yong, Tang, 2013. "Dynamic optimal capital growth with risk constraints," Economic Modelling, Elsevier, vol. 30(C), pages 586-594.
    • Handle: RePEc:eee:ecmode:v:30:y:2013:i:c:p:586-594
    DOI: 10.1016/j.econmod.2012.09.020
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    References listed on IDEAS

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    1. Harry M. Markowitz, 2011. "Investment for the Long Run: New Evidence for an Old Rule," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 35, pages 495-508, World Scientific Publishing Co. Pte. Ltd..
    2. Henry Allen Latane, 1959. "Criteria for Choice Among Risky Ventures," Journal of Political Economy, University of Chicago Press, vol. 67(2), pages 144-144.
    3. Paul A. Samuelson, 2011. "Why We Should Not Make Mean Log of Wealth Big Though Years to Act Are Long," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 34, pages 491-493, World Scientific Publishing Co. Pte. Ltd..
    4. David S. Johnson & Cecilia R. Aragon & Lyle A. McGeoch & Catherine Schevon, 1989. "Optimization by Simulated Annealing: An Experimental Evaluation; Part I, Graph Partitioning," Operations Research, INFORMS, vol. 37(6), pages 865-892, December.
    5. Nils H. Hakansson & Bruce L. Miller, 1975. "Compound-Return Mean-Variance Efficient Portfolios Never Risk Ruin," Management Science, INFORMS, vol. 22(4), pages 391-400, December.
    6. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    7. MacLean, Leonard C. & Sanegre, Rafael & Zhao, Yonggan & Ziemba, William T., 2004. "Capital growth with security," Journal of Economic Dynamics and Control, Elsevier, vol. 28(5), pages 937-954, February.
    8. Sanford J. Grossman & Zhongquan Zhou, 1993. "Optimal Investment Strategies For Controlling Drawdowns," Mathematical Finance, Wiley Blackwell, vol. 3(3), pages 241-276, July.
    9. Young, William E. & Trent, Robert H., 1969. "Geometric Mean Approximations of Individual Security and Portfolio Performance*," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(2), pages 179-199, June.
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