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Mean–variance optimization of terminal wealth and consumption

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  • Escobar-Anel, Marcos
  • Khemka, Gaurav
  • Zagst, Rudi

Abstract

We study a portfolio optimization problem for an investor with mean–variance (MV) preferences on terminal wealth and the level of consumption. Our consumption addition differs from other attempts in the literature, allowing for a more flexible treatment. We introduce admissible optimal and admissible efficient solutions to capture the consumption dimension. In a fair comparison to expected utility (EUT), we report a superior performance of our solution. This confirms the pitfall of MV investors using EUT solutions.

Suggested Citation

  • Escobar-Anel, Marcos & Khemka, Gaurav & Zagst, Rudi, 2025. "Mean–variance optimization of terminal wealth and consumption," Finance Research Letters, Elsevier, vol. 86(PB).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pb:s1544612325016745
    DOI: 10.1016/j.frl.2025.108420
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    References listed on IDEAS

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    1. 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.
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    4. Elena Vigna, 2020. "On Time Consistency For Mean-Variance Portfolio Selection," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 23(06), pages 1-22, September.
    5. Suleyman Basak & Georgy Chabakauri, 2010. "Dynamic Mean-Variance Asset Allocation," The Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 2970-3016, August.
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