Beliefs regarding fundamental value and optimal investing |
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Authors: | Bradford Cornell Jak?a Cvitani? Levon Goukasian |
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Institution: | (1) Technology Management and Financial Engineering, Polytechnic University, Six MetroTech Center, 11201 Brooklyn, NY, USA |
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Abstract: | Standard optimal portfolio selection models take no account of the special information that active investors believe they
possess. For example, active investors who believe they can place bounds on the price of a security will want to use that
information when assessing risk and expected return in order to construct an optimal portfolio. In this paper, we use two
continuous-time models to analyze how placing boundaries on the price of a stock affects assessed risk, expected returns,
and the optimal holdings of an active investor, and how those vary as a function of the relation between the stock price and
the boundaries. In particular, the optimal strategy takes significant long/short positions as the price nears its lower/upper
boundary. |
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Keywords: | |
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