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Portfolio Selection with Mandatory Bequest

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  • Jiacheng Feng

Abstract

In this paper, optimal consumption and investment decisions are studied for an investor who can invest in a fixed interest rate bank account and a stock whose price is a log normal diffusion. We present the method of the HJB equation in order to explicitly solve problems of this type with modifications such as a fixed percentage transaction cost and a mandatory bequest function. It is shown that the investor treats the mandatory bequest as an expense that she factors into her personal wealth when making consumption and transaction decisions. Furthermore, the investor keeps her portfolio proportions inside a fixed boundary relating to Merton's optimal proportion and the transaction costs.

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  • Jiacheng Feng, 2014. "Portfolio Selection with Mandatory Bequest," Papers 1409.3969, arXiv.org.
    • Handle: RePEc:arx:papers:1409.3969
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    References listed on IDEAS

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    1. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, March.
    2. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    3. M. H. A. Davis & A. R. Norman, 1990. "Portfolio Selection with Transaction Costs," Mathematics of Operations Research, INFORMS, vol. 15(4), pages 676-713, November.
    4. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    5. Magill, Michael J. P. & Constantinides, George M., 1976. "Portfolio selection with transactions costs," Journal of Economic Theory, Elsevier, vol. 13(2), pages 245-263, October.
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