Optimal Dynamic Asset Allocation: A Stochastic Invariance Approach

Abstract

Optimal Asset Allocation deals with how to divide the investor's wealth across some asset-classes in order to maximize the investor's gain. We consider the Optimal Asset Allocation in a multi-period investment settings: Optimal Dynamic Asset Allocation provides the (optimal) re-balancing policy to accomplish some investment's criteria. Given a sequence of target sets, which represent the portfolio specifications at each re-balancing time, an optimal portfolio allocation is synthesized for maximizing the joint probability for the portfolio to fulfill the target sets requirements. The approach pursued is based on Dynamic Programming. The optimal solution is shown to conditionally depend on the portfolio realization, thus providing a practical scheme for the dynamic portfolio re-balancing. Finally some case studies are given to show the proposed methodology.