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This paper investigates the optimal dynamic investment for an investor who maximizesconstant absolute risk aversion (CARA) utility in a discrete-time market with a riskfree bond and arisky stock.The risky stock is assumed to present both the dividend risk and the price risk.Withour assumptions,the dividend risk is equivalent to fundamental risk,and the price risk is equivalentto the noise trading risk.The analytical expression for the optimal investment strategy is obtainedby dynamic programming.The main result in this paper highlights the importance of differentiatingbetween noise trading risk and fundamental risk for the optimal dynamic investment.
This paper investigates the optimal dynamic investment for an investor who maximizesconstant absolute risk aversion (CARA) utility in a discrete-time market with a riskfree bond and arisky stock.The risky stock is assumed to present both the dividend risk and the price risk. Leadour assumptions, the dividend risk is equivalent to fundamental risk, and the price risk is equivalent to the noise trading risk. The analytical expression for the optimal investment strategy is obtained by dynamic programming. The main result in this paper highlights the importance of differentiating between noise trading risk and fundamental risk for the optimal dynamic investment.