Dynamic mean-variance portfolio optimization with noshorting constraint and correlated returns

Abstract

Rich empirical evidence shows the dependent relationship of the returns of risky assets between different time periods. However, current literature on the dynamic portfolio optimization model mainly adopts the assumption of independence of the returns. Due to the regulation of the financial market, the restriction of the short-selling is another indispensable factor in the portfolio management model. In this work, we study the discrete time dynamic mean-variance portfolio optimization model with noshorting constraint and the correlated returns of the risky assets. We adopt a formulation with a general structure of correlation, which enables us to better matching our model with real markets. By using the stochastic dynamic programming, we solve the problem analytically and derive the explicit portfolio policy, which is a piecewise affine function of the current wealth.