Uncertainty Aversion and Robust Portfolio Choices

Optimal portfolio rules are derived under uncertainty aversion by formulating the portfolio choice problem as a robust control problem. Using a power utility function of the form C with 0 < < 1; we present the solution of the robust portfolio choice problem in the cases of one and two risky assets. In particular, for two risky assets and one risk-free asset case, we con…rm our earlier theoretical result [30], that under uncertainty aversion the total holdings of risky assets as a proportion of the investor’s wealth could increase as compared to the holdings under the Merton rule, which is the standard risk aversion case.