2012•Unpublished venueRequires access

Application of stochastic control theory to the optimal portfolio selection problem

Miloš Japundžić, Dragan Jočić, Ivan Pavkov

Abstract

Application of stochastic control theory to the optimal portfolio selection problem, in the case when portfolio consists of two assets with different level of risk is illustrated. Choosing power functions and natural logarithmic for the utility function, and using a converse of Hamilton-Jacobi-Bellman (HJB) theorem, the formula for optimal portfolio is derived.

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Key concepts: Hamilton–Jacobi–Bellman equation, Portfolio, Converse, Stochastic control, Mathematical optimization, Logarithm, Selection (genetic algorithm), Optimal control