Maximum expected utility of Markovian predicted wealth

Abstract

This paper proposes an ex-post comparison of portfolio selection strategies based on the assumption that the portfolio returns evolve as Markov processes. Thus we propose the comparison of the ex-post final wealth obtained with the maximization of the expected negative exponential utility and expected power utility for different risk aversion parameters. In particular, we consider strategies where the investors recalibrate their portfolios at a fixed temporal horizon and we compare the wealth obtained either under the assumption that returns follow a Markov chain or under the assumption we have independent identically distributed data. Thus, we implement an heuristic algorithm for the global optimum in order to overcome the intrinsic computational complexity of the proposed Markovian models. © 2009 Springer Berlin Heidelberg.