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Dynamic optimization of a portfolio

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  • Oleg Malafeyev
  • Achal Awasthi

Abstract

In this paper, we consider the problem of optimization of a portfolio consisting of securities. An investor with an initial capital, is interested in constructing a portfolio of securities. If the prices of securities change, the investor shall decide on reallocation of the portfolio. At each moment of time, the prices of securities change and the investor is interested in constructing a dynamic portfolio of securities. The investor wishes to maximize the value of his portfolio at the end of time $T$. We use a novel theoretical approach based on dynamic programming to solve the age old problem of dynamic programming. We consider two cases i.e. Deterministic and Stochastic to approach the problem and show how the portfolio is maximized using dynamic programming.

Suggested Citation

  • Oleg Malafeyev & Achal Awasthi, 2017. "Dynamic optimization of a portfolio," Papers 1712.00585, arXiv.org.
    • Handle: RePEc:arx:papers:1712.00585
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    References listed on IDEAS

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    1. Lin Chen & Jin Peng & Bo Zhang & Isnaini Rosyida, 2017. "Diversified models for portfolio selection based on uncertain semivariance," International Journal of Systems Science, Taylor & Francis Journals, vol. 48(3), pages 637-648, February.
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    3. Bo Zhang & Jin Peng & Shengguo Li, 2015. "Uncertain programming models for portfolio selection with uncertain returns," International Journal of Systems Science, Taylor & Francis Journals, vol. 46(14), pages 2510-2519, October.
    4. Li, Xiang & Qin, Zhongfeng, 2014. "Interval portfolio selection models within the framework of uncertainty theory," Economic Modelling, Elsevier, vol. 41(C), pages 338-344.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    6. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(2), pages 127-151, June.
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