Risk Management for an Internationally Diversified Portfolio
In this paper we explicitly compute the optimal asset allocation for an investor maximizing the expected (CRRA) utility of his final wealth in a simple framework with: (i) a stochastic domestic interest rate, (ii) a stochastic exchange rate, (iii) both a domestic and a foreign riskless asset, and (iv) both a domestic and a foreign risky asset. This explicit solution allows us to widely investigate the behaviour of the optimal portfolio hedging component with respect to all the parameters in the model. In particular, we show a numerical simulation for investigating the hedging strategy against the exchange rate risk.
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Volume (Year): 58 (2005)
Issue (Month): 1 ()
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