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Investment Problem (investment + problem)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting62%

Selected Abstracts

Optimal Dynamic Trading Strategies

ECONOMIC NOTES, Issue 1 2004
Douglas T. Breeden
This article presents a straightforward technique for computing solutions to discrete, multi-period consumption/investment problems. It solves for the optimal stochastic consumption plans, as well as the optimal dynamic trading strategies that maximize utility for an individual. The technique permits general utility functions that may or may not be time-separable. It also allows general changes in the investment opportunity set and allows the user to impose upper and lower bounds on trading behaviour. Divergent borrowing and lending rates can be handled, as can stochastic labour income risks. Computed solutions verify the predictions of well-known intertemporal works by Merton, Breeden and others. J.E.L.:G13). [source]

Investment with an arithmetic process and lags

MANAGERIAL AND DECISION ECONOMICS, Issue 5 2000
Avner Bar-Ilan
This paper presents an explicit solution of a simple investment problem with entry lags and when the underlying stochastic process is arithmetic. It is shown that, without abandonment, the optimal investment plan is independent of the length of the lag. Copyright © 2000 John Wiley & Sons, Ltd. [source]

A Dynamic Investment Model with Control on the Portfolio's Worst Case Outcome

MATHEMATICAL FINANCE, Issue 4 2003
Yonggan Zhao
This paper considers a portfolio problem with control on downside losses. Incorporating the worst-case portfolio outcome in the objective function, the optimal policy is equivalent to the hedging portfolio of a European option on a dynamic mutual fund that can be replicated by market primary assets. Applying the Black-Scholes formula, a closed-form solution is obtained when the utility function is HARA and asset prices follow a multivariate geometric Brownian motion. The analysis provides a useful method of converting an investment problem to an option pricing model. [source]

Mean,variance efficiency with extended CIR interest rates

APPLIED STOCHASTIC MODELS IN BUSINESS AND INDUSTRY, Issue 1 2010
René Ferland
Abstract We study a mean,variance investment problem in a continuous-time framework where the interest rates follow Cox,Ingersoll,Ross dynamics. We construct a mean,variance efficient portfolio through the solutions of backward stochastic differential equations. We also give sufficient conditions under which an explicit analytic expression is available for the mean,variance optimal wealth of the investor. Copyright © 2009 John Wiley & Sons, Ltd. [source]

Optimal investment problem with stochastic interest rate and stochastic volatility: Maximizing a power utility

APPLIED STOCHASTIC MODELS IN BUSINESS AND INDUSTRY, Issue 3 2009
Jinzhu Li
Abstract In this paper, we assume that an investor can invest his/her wealth in a bond and a stock. In our wealth model, the stochastic interest rate is described by a Cox,Ingersoll,Ross (CIR) model, and the volatility of the stock is proportional to another CIR process. We obtain a closed-form expression of the optimal policy that maximizes a power utility. Moreover, a verification theorem without the usual Lipschitz assumptions is proved, and the relationships between the optimal policy and various parameters are given. Copyright © 2009 John Wiley & Sons, Ltd. [source]

Investment planning under uncertainty and flexibility: the case of a purchasable sales contract*

AUSTRALIAN JOURNAL OF AGRICULTURAL & RESOURCE ECONOMICS, Issue 1 2008
Oliver Musshoff
Investment decisions are not only characterised by irreversibility and uncertainty but also by flexibility with regard to the timing of the investment. This paper describes how stochastic simulation can be successfully integrated into a backward recursive programming approach in the context of flexible investment planning. We apply this hybrid approach to a marketing question from primary production which can be viewed as an investment problem: should grain farmers purchase sales contracts which guarantee fixed product prices over the next 10 years? The model results support the conclusion from dynamic investment theory that it is essential to take simultaneously account of uncertainty and flexibility. [source]

OPTIMAL CONSUMPTION AND PORTFOLIO DECISIONS WITH PARTIALLY OBSERVED REAL PRICES

MATHEMATICAL FINANCE, Issue 2 2009
Alain Bensoussan
We consider optimal consumption and portfolio investment problems of an investor who is interested in maximizing his utilities from consumption and terminal wealth subject to a random inflation in the consumption basket price over time. We consider two cases: (i) when the investor observes the basket price and (ii) when he receives only noisy observations on the basket price. We derive the optimal policies and show that a modified Mutual Fund Theorem consisting of three funds holds in both cases. The compositions of the funds in the two cases are the same, but in general the investor's allocations of his wealth into these funds will differ. However, in the particular case when the investor has constant relative risk-aversion (CRRA) utility, his optimal investment allocations into these funds are also the same in both cases. [source]

Real options for precautionary fisheries management

FISH AND FISHERIES, Issue 2 2008
Eli P Fenichel
Abstract The 1996 Food and Agriculture Organization's (FAO) ,Guidelines on the Precautionary Approach to Fisheries and Species Introduction' raise important issues for fisheries managers, but fail to prescribe an approach for risk management. The distinguishing characteristics of the ,precautionary approach' are the inclusion of uncertainty and ,an elaboration on the burden of proof'. The FAO precautionary approach emphasizes that managers should be risk-averse, but does not provide tools for determining the appropriate degree of risk aversion. Consequently, application of the precautionary approach often leads to decision-making based on ad hoc safety margins. These safety margins are seldom chosen with explicit consideration of trade-offs. If the emphasis was shifted to choosing between competing uncertainties, then managers could manage risk. By attempting to avoid risk, managers may gain exposure to other risks and perhaps miss valuable opportunities. We place fishery management problems within the rubric of ,real investment' problems, and compare and contrast the consideration of risk by alternative investment frameworks. We show that traditional investment frameworks are inappropriate for fishery management, and furthermore, that traditional precautionary approaches are arbitrary and without basis in decision theory. Quantitative decision-making techniques, such as formal decision analysis (FDA), enable integration of competing hypotheses that help alleviate burden-of-proof issues. These techniques help analysts consider sources of uncertainty. FDA, however, can still be subject to arbitrary safety margins because such analyses often focus on determining which strategies best achieve, or avoid, targets that have been established without complete consideration of trade-offs. A managerial finance approach, real options analysis (ROA), is an alternative and complementary decision-making technique that enables managers to compute precautionary adjustments that couple the size of the ,safety margin' with the amount of uncertainty, thereby optimizing risk exposure and avoiding the need for arbitrary safety margins. We illustrate the advantages of an approach that combines FDA and ROA, using a heuristic example about a decision to re-introduce Atlantic salmon (Salmo salar L.) into Lake Ontario. Finally, we provide guidance on applying ROA to other fishery problems. The precautionary approach requires that managers consider risk, but considering risk is not the same as managing it. Here ROA is useful. [source]