Optimal Portfolio Allocation of a Lumpy Asset in the Presence of Transaction Costs PDF Download

Author: Gerson M. Goldberg
Publisher:
ISBN:
Category :
Languages : en
Pages : 368

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Author: Ricardo A. Rodriguez-Pedraza
Publisher:
ISBN:
Category :
Languages : en
Pages : 70

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We study the classical problem of allocation of funds between a bank account which grows with a deterministic rate and of a risky asset such as a stock whose value follows a geometric Brownian motion with a drift. We maximize the expected rate of growth of the net wealth in the presence of proportional transaction costs when transactions are made between the two assets. Our optimal strategy keeps the ratio of the values of these assets in an interval with minimum control. Finally an application of the model to a real stock is presented.

Author: William Kinlaw
Publisher: John Wiley & Sons
ISBN: 1119402425
Category : Business & Economics
Languages : en
Pages : 259

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Book Description
Since the formalization of asset allocation in 1952 with the publication of Portfolio Selection by Harry Markowitz, there have been great strides made to enhance the application of this groundbreaking theory. However, progress has been uneven. It has been punctuated with instances of misleading research, which has contributed to the stubborn persistence of certain fallacies about asset allocation. A Practitioner's Guide to Asset Allocation fills a void in the literature by offering a hands-on resource that describes the many important innovations that address key challenges to asset allocation and dispels common fallacies about asset allocation. The authors cover the fundamentals of asset allocation, including a discussion of the attributes that qualify a group of securities as an asset class and a detailed description of the conventional application of mean-variance analysis to asset allocation.. The authors review a number of common fallacies about asset allocation and dispel these misconceptions with logic or hard evidence. The fallacies debunked include such notions as: asset allocation determines more than 90% of investment performance; time diversifies risk; optimization is hypersensitive to estimation error; factors provide greater diversification than assets and are more effective at reducing noise; and that equally weighted portfolios perform more reliably out of sample than optimized portfolios. A Practitioner's Guide to Asset Allocation also explores the innovations that address key challenges to asset allocation and presents an alternative optimization procedure to address the idea that some investors have complex preferences and returns may not be elliptically distributed. Among the challenges highlighted, the authors explain how to overcome inefficiencies that result from constraints by expanding the optimization objective function to incorporate absolute and relative goals simultaneously. The text also explores the challenge of currency risk, describes how to use shadow assets and liabilities to unify liquidity with expected return and risk, and shows how to evaluate alternative asset mixes by assessing exposure to loss throughout the investment horizon based on regime-dependent risk. This practical text contains an illustrative example of asset allocation which is used to demonstrate the impact of the innovations described throughout the book. In addition, the book includes supplemental material that summarizes the key takeaways and includes information on relevant statistical and theoretical concepts, as well as a comprehensive glossary of terms.

Author: William Kinlaw
Publisher: John Wiley & Sons
ISBN: 1119817722
Category : Business & Economics
Languages : en
Pages : 371

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Book Description
Discover a masterful exploration of the fallacies and challenges of asset allocation In Asset Allocation: From Theory to Practice and Beyond—the newly and substantially revised Second Edition of A Practitioner’s Guide to Asset Allocation—accomplished finance professionals William Kinlaw, Mark P. Kritzman, and David Turkington deliver a robust and insightful exploration of the core tenets of asset allocation. Drawing on their experience working with hundreds of the world’s largest and most sophisticated investors, the authors review foundational concepts, debunk fallacies, and address cutting-edge themes like factor investing and scenario analysis. The new edition also includes references to related topics at the end of each chapter and a summary of key takeaways to help readers rapidly locate material of interest. The book also incorporates discussions of: The characteristics that define an asset class, including stability, investability, and similarity The fundamentals of asset allocation, including definitions of expected return, portfolio risk, and diversification Advanced topics like factor investing, asymmetric diversification, fat tails, long-term investing, and enhanced scenario analysis as well as tools to address challenges such as liquidity, rebalancing, constraints, and within-horizon risk. Perfect for client-facing practitioners as well as scholars who seek to understand practical techniques, Asset Allocation: From Theory to Practice and Beyond is a must-read resource from an author team of distinguished finance experts and a forward by Nobel prize winner Harry Markowitz.

Author: Ajay Subramanian Aiyer
Publisher:
ISBN:
Category : Investments
Languages : en
Pages : 28

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Author: Dorianne Perrucci
Publisher: John Wiley & Sons
ISBN: 0470522550
Category : Business & Economics
Languages : en
Pages : 379

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Book Description
An easy-to-understand how-to guide to the single most important thing you can do in investing — choosing and mixing your assets successfully. You don’t need to be an expert analyst, a star stock-picker, or a rocket scientist to have better investment results than most other investors. You just need to allocate your assets in the right way, and have the conviction to stick with that allocation. The big secret behind asset allocation — the secret that most sophisticated investors know and use to their benefit — is that it’s really not all that hard to do. Asset Allocation For Dummies serves as a comprehensive guide to maximizing returns and minimizing risk — while managing taxes, fees and other costs — in putting together a portfolio to reflect your unique financial goals. Jerry A. Miccolis (Basking Ridge, NJ), CFA®, CFP®, FCAS, MAAA is a widely quoted expert commentator who has been interviewed in The New York Times and the Wall Street Journal, and appeared on CBS Radio and ABC-TV. He is a senior financial advisor and co-owner of Brinton Eaton Wealth Advisors (www.brintoneaton.com), a fee-only investment management, tax advisory and financial planning firm in Madison, N.J. Dorianne R. Perrucci (Scotch Plains, NJ) is a freelance writer who has been published in The New York Times, Newsweek, and TheStreet.com, and has collaborated on several financial books, including I.O.U.S.A, One Nation, Under Stress, In Debt (Wiley, 2008).

Author: Richard E. Oberuc
Publisher: McGraw Hill Professional
ISBN: 9780071426695
Category : Business & Economics
Languages : en
Pages : 344

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Author: Hong Liu
Publisher:
ISBN:
Category :
Languages : en
Pages : 36

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Models with event risk (the possibility of sudden large price movements) have proven important for option pricing (e.g., Bates (1996))and optimal portfolio selection (e.g., Liu, Longstaff and Pan(2003)). However, most of the existing studies ignore transaction costs which are prevalent in almost all of the financial markets. How investors should trade in the presence of event risks and transaction costs remains an important but unanswered question. In this paper, we consider the optimal trading strategy for a CRRA investor who derives utility from terminal wealth and can continuously trade in a riskless asset and a risky asset. The risky asset, whose price follows a jump diffusion, is subject to proportional transaction costs. We show that the optimal trading strategy is to maintain the fraction of wealth invested in the risky asset between two bounds. In contrast to the case without jump risk, this fraction can jump outside the bounds which implies a discrete transaction back to the closest boundary and thus a greater transaction cost payment. We characterize the value function and provide bounds on the trading boundaries. Somewhat surprisingly, we find that an increase in transaction costs may increase trading frequency. Our numerical results suggest that event risk significantly reduces stock holdings and decreases trading frequency. We also show that the boundaries are affected not only by jump sizes but also by the uncertainty about jump sizes. Furthermore, we examine how the optimal transaction boundaries vary through time for investors with deterministic horizons.

Author: Cong Liu
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Author: Raj Sau
Publisher:
ISBN: 9781267768278
Category :
Languages : en
Pages : 98

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In this thesis we study the performance of a re-balanced portfolio strategy relative to the market portfolio in the presence of transaction costs. The strategy involves re-balancing to fixed weights at regular time steps. We consider an equity market with m Stocks. Our goal is to compare the asymptotic growth rate of such strategies to the market. With the application of an Ergodic theorem, we show that the problem can be transformed to computing the expectation of a functional of the market weightsof the stocks. Expressing the gain in the re-balanced portfolio over the market portfolio as a functional of the market weights, we derive the condition under which the growth rate of the rebalanced strategy beats that of the market portfolio. We also show a method to compute the maximum transaction cost that can be paid in order for the rebalanced portfolio to beat the market portfolio. We discuss the result in the context of the Volatility-Stabilized model and the Geometric Brownian Motion model. In the secondpart of the thesis, we define the optimal re-balancing portfolio that maximizes the growth rate within the class of such fixed weight re-balancing strategies. We study the relationship of the optimum portfolio and optimal growth rate to the re-balancing time step and transaction cost coefficient. Finally, we look at the performance of such re-balancing strategies on real data sets obtained from Yahoo Finance. The study indicates that for small trading time steps, the re-balancing strategy under performs compared to the market in the presence of transaction costs.