Construction and Properties of Maximum Volatility Portfolio

We study a problem of constructing a portfolio using N assets that has the largest distributional distance from the index. Such a portfolio - among other interesting properties - maximizes risk neutral probability of... [ view full abstract ]

We study a problem of constructing a portfolio using N assets that has the largest distributional distance from the index. Such a portfolio - among other interesting properties - maximizes risk neutral probability of outperforming the index within a fixed time. The construction of this portfolio is mathematically a rather complicated problem and we show its solution based on stochastic optimal control techniques. It turns out that the resulting portfolio always invests in a single asset and it departs from the index only in a small way. We illustrate our findings on a selection of currencies and NASDAQ100 index.