Dynamic optimal capital growth of diversified investment |
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| Authors: | Luo Yong Zhu Bo Tang Yong |
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| Institution: | 1. College of Science, Ningbo University of Technology, 315211 Ningbo, People's Republic of China;2. School of Management and Economics, University of Electronic Science and Technology, 610054 Chengdu, People's Republic of China;3. School of Finance, Southwestern University of Finance and Economics, 610074 Chengdu, People's Republic of China;4. School of Management and Economics, University of Electronic Science and Technology, 610054 Chengdu, People's Republic of China;5. Department of Physics, University of Fribourg, Chemin du Musée 3, CH-1700 Fribourg, Switzerland |
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| Abstract: | We investigate the problem of dynamic optimal capital growth of diversified investment. A general framework that the trader maximize the expected log utility of long-term growth rate of initial wealth was developed. We show that the trader's fortune will exceed any fixed bound when the fraction is chosen less than critical value. But, if the fraction is larger than that value, ruin is almost sure. In order to maximize wealth, we should choose the optimal fraction at each trade. Empirical results with real financial data show the feasible allocation. The larger the fraction and hence the larger the chance of falling below the desired wealth growth path. |
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| Keywords: | capital growth asset allocation portfolio optimization diversification reinvestment |
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