Title: Growth maximisation and downside protection using power-log utility functions for optimising portfolios with derivatives

Authors: Jivendra K. Kale

Addresses: School of Economics and Business Administration, Saint Mary's College of California, 1928 Saint Mary's Road, Moraga, CA, 94556, USA

Abstract: In the past few years, there has been a tremendous growth in derivative markets around the world and the quantity and quality of information about derivative instruments. These developments offer us new opportunities to harness the unique return distribution characteristics of derivatives, to build portfolios that conform more closely to investor preferences than is possible with Markowitz mean variance analysis or with portfolio insurance techniques that offer downside protection. This study shows how portfolio optimisation with power-log utility functions can be used to construct portfolios containing derivatives, to produce portfolios that have high growth potential and downside protection. It also compares power-log optimisation with portfolio insurance, which is one of the few portfolio construction techniques that incorporate the unique characteristics of derivative instruments.

Keywords: growth maximisation; downside protection; power-log utility functions; portfolio optimisation; derivatives; portfolio insurance; prospect theory; multiperiod portfolio theory; mean variance analysis; power-log optimisation.

DOI: 10.1504/IJCAT.2009.024085

International Journal of Computer Applications in Technology, 2009 Vol.34 No.4, pp.309 - 314

Published online: 25 Mar 2009 *

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