Growth maximisation and downside protection using power-log utility functions for optimising portfolios with derivatives Online publication date: Wed, 25-Mar-2009
by Jivendra K. Kale
International Journal of Computer Applications in Technology (IJCAT), Vol. 34, No. 4, 2009
Abstract: In the past few years, there has been a tremendous growth in derivative markets around the world and the quantity and quality of information about derivative instruments. These developments offer us new opportunities to harness the unique return distribution characteristics of derivatives, to build portfolios that conform more closely to investor preferences than is possible with Markowitz mean variance analysis or with portfolio insurance techniques that offer downside protection. This study shows how portfolio optimisation with power-log utility functions can be used to construct portfolios containing derivatives, to produce portfolios that have high growth potential and downside protection. It also compares power-log optimisation with portfolio insurance, which is one of the few portfolio construction techniques that incorporate the unique characteristics of derivative instruments.
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