IDEAS home Printed from https://ideas.repec.org/a/spr/finsto/v3y1999i3p275-294.html
   My bibliography  Save this article

Beating a moving target: Optimal portfolio strategies for outperforming a stochastic benchmark

Author

Listed:
  • Sid Browne

    (402 Uris Hall, Graduate School of Business, Columbia University, New York, NY 10027, USA Manuscript)

Abstract

We consider the portfolio problem in continuous-time where the objective of the investor or money manager is to exceed the performance of a given stochastic benchmark, as is often the case in institutional money management. The benchmark is driven by a stochastic process that need not be perfectly correlated with the investment opportunities, and so the market is in a sense incomplete. We first solve a variety of investment problems related to the achievement of goals: for example, we find the portfolio strategy that maximizes the probability that the return of the investor's portfolio beats the return of the benchmark by a given percentage without ever going below it by another predetermined percentage. We also consider objectives related to the minimization of the expected time until the investor beats the benchmark. We show that there are two cases to consider, depending upon the relative favorability of the benchmark to the investment opportunity the investor faces. The problem of maximizing the expected discounted reward of outperforming the benchmark, as well as minimizing the discounted penalty paid upon being outperformed by the benchmark is also discussed. We then solve a more standard expected utility maximization problem which allows new connections to be made between some specific utility functions and the nonstandard goal problems treated here.

Suggested Citation

  • Sid Browne, 1999. "Beating a moving target: Optimal portfolio strategies for outperforming a stochastic benchmark," Finance and Stochastics, Springer, vol. 3(3), pages 275-294.
  • Handle: RePEc:spr:finsto:v:3:y:1999:i:3:p:275-294
    Note: received: May 1997; final version received: April 1998
    as

    Download full text from publisher

    File URL: http://link.springer.de/link/service/journals/00780/papers/9003003/90030275.pdf
    Download Restriction: Access to the full text of the articles in this series is restricted
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Portfolio theory; benchmarking; active portfolio management; constant proportions; growth optimal policy; stochastic control; diffusions;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:finsto:v:3:y:1999:i:3:p:275-294. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.