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Portfolio Selections with Innate Learning Ability

Author

Listed:
  • Jin-Ray Lu

    (Department of Finance, National Dong Hwa University, Taiwan)

  • Chih-Ming Chan

    (Department of Finance, National Chung Cheng University, Taiwan)

  • Wen-Shen Li

    (Department of Finance, National Dong Hwa University, Taiwan)

Abstract

This study explores how innate learning ability changes portfolio selection decision-making in a continuous-time framework. We re-solve Samuelson-Merton¡¦s portfolio choice problem framed in a fixed investment opportunity set for an individual with a learning ability. In contrast to traditional theoretical results, we suggest that risk-averse investors with a risk-cognitive ability hold a lower fraction of risky stocks to hedge against the jump risk and volatility risk since the investors are cognizant of the market risks. In addition, an individual whose learning process correlates strongly with stock movements would be likely to invest more in stocks.

Suggested Citation

  • Jin-Ray Lu & Chih-Ming Chan & Wen-Shen Li, 2011. "Portfolio Selections with Innate Learning Ability," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 10(3), pages 201-217, December.
    • Handle: RePEc:ijb:journl:v:10:y:2011:i:3:p:201-217
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    learning; asset allocation; cognition;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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