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The mean-variance investment problem in a constrained financial market
Authors:Wan Gui Sun  Chun Feng Wang
Affiliation:aSchool of Economics and Management, Northwest University, Xi’an 710069, PR China;bSchool of Management, Tianjin University, Tianjin 300072, PR China
Abstract:This paper extends the mean-variance analysis and the two-fund separation theorem to a market with some constraints, such as, the incompleteness, prohibition of short-selling, and partial information, with stochastic interest rate, and with stochastic volatility for risky assets. By maximizing a quadratic utility of terminal wealth, we show that the efficient frontier for the problem is a straight line in the mean-standard-deviation diagram. The quadratic utility function exhibits mean-variance efficiency. Our results apply to portfolios of claims in a single period, multiperiod, and continuous time.
Keywords:Two-fund separation theorem   Efficient frontier   Constrained financial market   Mean-variance investment problem   Continuous time
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