A Computational Scheme for the Optimal Strategy in an Incomplete Market

We examine the optimal portfolio selection problem of a single agent who receives an unhedgeable endowment. The agent wishes to optimize his/her log-utility derived from his/her terminal wealth. We do not solve this problem analytically but construct a recursive computational algorithm which approximates the optimal one. We present an intelligent initial portfolio which requires, numerically, about 25% fewer corrective steps in the algorithm than a random initial portfolio, and outperforms the portfolio which ignores the unhedgeable risk of the endowment

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Year of publication:	[2006]
Authors:	Keppo, Jussi
Other Persons:	Meng, Xu (contributor) ; Sullivan, Michael G. (contributor)
Publisher:	[2006]: [S.l.] : SSRN

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