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How Best to Flip-Flop If You Must: Integer Dynamic Stochastic Programming for Either-Or

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  • Samuelson, Paul A

Abstract

Standard portfolio analysis presumes one can blend different securities continuously. When one must choose all of one portfolio or all of another, we are in stochastic digital programming: either-or, zero-or-one choice. The algorithm for doing this optimally is shown to be simpler than in real variable maximizing, a switch from the usual extra complexities of digital programming. The Bellman multi-period dynamic programming is shown, paradoxically, to make it possible for a risk-averse investor to want sometimes to embrace an unfair gamble. The superiority of within-time diversification over across-time diversification carries over to this flip-flop case. Copyright 1997 by Kluwer Academic Publishers

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  • Samuelson, Paul A, 1997. "How Best to Flip-Flop If You Must: Integer Dynamic Stochastic Programming for Either-Or," Journal of Risk and Uncertainty, Springer, vol. 15(3), pages 183-190, December.
    • Handle: RePEc:kap:jrisku:v:15:y:1997:i:3:p:183-90
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    Cited by:

    1. Tak Siu, 2012. "A BSDE approach to risk-based asset allocation of pension funds with regime switching," Annals of Operations Research, Springer, vol. 201(1), pages 449-473, December.
    2. Bonini, Stefano & Capizzi, Vincenzo & Valletta, Mario & Zocchi, Paola, 2018. "Angel network affiliation and business angels' investment practices," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 592-608.

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