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Portfolio Selection in a Lognormal Market When the Investor Has a Power Utility Function

Published online by Cambridge University Press:  19 October 2009

J. A. Ohlson  and
W. T. Ziemba
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Extract

Multiasset portfolio selection models stated in terms of the expected utility criterion generally require the evaluation of multiple integrals. This reality has severely hindered attempts towards the development of computation methods to determine optimal portfolio allocations when there are a large number of assets. Aside from special cases, expected utility is not convergent into a simple closed form; the complexity from the point of view of computation is then perhaps most easily appreciated if one realizes that every iteration in a nonlinear program demands the estimation of several integrals (see Ziemba [23] for details). Such calculations are extremely costly when the number of assets is large. It is, consequently, of interest to approximate the expected utility function by a function which is easier to optimize over the set of feasible portfolios.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 1 , March 1976 , pp. 57 - 71
Copyright
Copyright © School of Business Administration, University of Washington 1976

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Footnotes

*

University of California, Berkeley, and University of British Columbia. This research was partially supported by the National Research Council of Canada. The authors would like to thank C. E. Lemke, D. Murdoch, S. J. Press, and an anonymous referee for valuable comments on an earlier version of this paper.

References

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