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Optimal portfolio selection and compression in an incomplete market

  • Nikolai Dokuchaev
  • Ulrich Haussmann

We investigate an optimal investment problem with a general performance criterion which, in particular, includes discontinuous functions. Prices are modeled as diffusions and the market is incomplete. We find an explicit solution for the case of limited diversification of the portfolio, i.e. for the portfolio compression problem. By this we mean that an admissible strategies may include no more than m different stocks concurrently, where m may be less than the total number n of available stocks.

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File URL: http://arxiv.org/pdf/math/0207260
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Paper provided by arXiv.org in its series Papers with number math/0207260.

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Date of creation: Jul 2002
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Publication status: Published in Quantitative Finance 1(2001), iss. 3, 336-345
Handle: RePEc:arx:papers:math/0207260
Contact details of provider: Web page: http://arxiv.org/

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  1. Martin Kulldorff & Ajay Khanna, 1999. "A generalization of the mutual fund theorem," Finance and Stochastics, Springer, vol. 3(2), pages 167-185.
  2. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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