Construction and Properties of Maximum Volatility Portfolio
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... [ 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.
Authors

Jan Vecer
(Charles University)

Robert Navrátil
(Charles University)
Topic Areas
Computational Finance , Optimal Control , Trading Strategies
Session
THPSY » Volatility (14:30  Thursday, 19th July, Synge)
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