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RFS Advance Access published online on May 15, 2006
Review of Financial Studies, doi:10.1093/rfs/hhl001
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Article

Portfolio Selection In Stochastic Environments

Jun Liu 1 *
1 University of California, San Diego

* To whom correspondence should be addressed.
Jun Liu, E-mail: junliu{at}ucsd.edu


  Abstract

In this paper, I explicitly solve dynamic portfolio choice problems, up to the solution of an ordinary differential equation (ODE), when the asset returns are quadratic and the agent has a constant relative risk aversion coefficient. My solution includes as special cases many existing explicit solutions of dynamic portfolio choice problems. I also present three applications that are not in the literature. Application 1 is the bond portfolio selection problem when bond returns are described by "quadratic term structure models". Application 2 is the stock portfolio selection problem when stock return volatility is stochastic as in Heston (1993). Application 3 is a bond and stock portfolio selection problem when the interest rate is stochastic and stock returns display stochastic volatility.


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