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Optimal Investment And Consumption Strategies Under Risk For A Class Of Utility Functions

In: THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE

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  • NILS H. HAKANSSON

Abstract

This paper develops a sequential model of the individual's economic decision problem under risk. On the basis of this model, optimal consumption, investment, and borrowing-lending strategies are obtained in closed form for a class of utility functions. For a subset of this class the optimal consumption strategy satisfies the permanent income hypothesis precisely. The optimal investment strategies have the property that the optimal mix of risky investments is independent of wealth, noncapital income, age, and impatience to consume. Necessary and sufficient conditions for long-run capital growth are also given.

Suggested Citation

  • Nils H. Hakansson, 2011. "Optimal Investment And Consumption Strategies Under Risk For A Class Of Utility Functions," 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 8, pages 91-111, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814293501_0008
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