Research Discussion Papers, Bank of Finland
Along but beyond mean-variance: Utility maximization in a semimartingale model
Abstract: It is well known that under certain assumptions the
strategy of an investor maximizing his expected utility coincides with the
mean-variance optimal strategy. In this paper we show that the two
strategies are not equal in general and find the connection between a
utility maximizing and a mean-variance optimal strategy in a continuous
semimartingale model. That is done by showing that the utility maximizing
strategy of a CARA investor can be expressed in terms of expectation and
the expected quadratic variation of the underlying price process. It
coincides with the mean-variance optimal strategy if the underlying price
process is a local martingale.
Keywords: mean-variance portfolios; utility maximization; dynamic portfolio selection; quadratic variation; (follow links to similar papers)
JEL-Codes: C61; G11; (follow links to similar papers)
29 pages, March 11, 2008
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