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Optimal Portfolio Selection With Borrowing Constraints And Background Risk Under The Safety-first Rule

Posted on:2013-04-27Degree:MasterType:Thesis
Country:ChinaCandidate:W Z YuFull Text:PDF
GTID:2269330422465550Subject:Quantitative Economics
Abstract/Summary:PDF Full Text Request
Portfolio optimization has always been the hot topic in the field of finance. Any investordefinitely pursue higher returns. For example, the investment of Nation Social Security Fundof China is facing enormous gap.Though it must guarantee investing safety, it also needs toincrease its value to satisfy the requirement of our society by investing. Therefore, how tostrengthen investment’s safety and increase investment returns has become a hot spot in theacademic field and it is an urgent problem to be solved.Modified safety-first rule makes the risk control as a starting point, emphasizing safetyand preventing the occurrence of extreme loss. On this basis, it pursues the maximization ofinvestment’ return. And recent years, the great influences of the global financial crisis causedby subprime crisis have given rise to discussions on borrowing constraints and backgroundrisk and so on. Therefore, first,according to the classical safety-first criteria, by analyzingdifferent borrowing constraints, this paper sets up a new modified safety-first modelincluding only saving、only borrowing and both saving and borrowing conditions. Thenderive the optimal solution under the given expected revenue by means of Lagrangianfunction and Kuhn-Tucker theorem under the assumption of allowed short sell and aalgorithm of not allowed short sell. After that, it establishes a MSF model with backgroundrisk which respectively considering the return of background assets and financial assetscorrelated and uncorrelated conditions. Then,we obtain the optimal solutions by using thesame methods. Finally, on the basis of the capital market’s data, the paper gives the empiricalanalysis of these solutions under the probability of10%, giving detailed analysis of theoptimal portfolio.The main results are as follows: Under given expected return, the only saving portfolio isrelated to the riskless saving rates and the only borrowing portfolio is influenced by theborrowing rates and limit of borrowing.The interest margin influences the both saving andborrowing portfolio. Facing with background risk, the optimal portfolio depends on thecorrelation coefficient of background risk assets return and financial risk assets return.
Keywords/Search Tags:Borrowing constraints, Background risk, Modified safety-first, Investmentportfolio
PDF Full Text Request
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