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Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case
Abstract
OST models of portfolio selection have M been one-period models. I examine the combined problem of optimal portfolio selection and consumption rules for an individual in a continuous-time model whzere his income is generated by returns on assets and these returns or instantaneous growth rates are stochastic. P. A. Samuelson has developed a similar model in discrete-time for more general probability distributions in a companion paper [8]. I derive the optimality equations for a multiasset problem when the rate of returns are generated by a Wiener Brownian-motion process. A particular case examined in detail is the two-asset model with constant relative riskaversion or iso-elastic marginal utility. An explicit solution is also found for the case of constant absolute risk-aversion. The general technique employed can be used to examine a wide class of intertemporal economic problems under uncertainty. In addition to the Samuelson paper [8], there is the multi-period analysis of Tobin [9]. Phelps [6] has a model used to determine the optimal consumption rule for a multi-period example where income is partly generated by an asset with an uncertain return. Mirrless [5] has developed a continuous-time optimal consumption model of the neoclassical type with technical progress a random variable.
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Citations
Cited by
Predicting excess stock returns out of sample: Can anything beat the historical average?
Campbell, J. Y., & Thompson, S. B. (2008) · Review of Financial Studies · doi:10.1093/rfs/hhm055 · Cited by 2,919
“Merton (1969) presents the analogous portfolio solution for the case where the investor has power utility with relative risk aversion 2, asset returns are lognormally distributed, and the portfolio can be continuously rebalanced.”
BackgroundMyopic Loss Aversion and the Equity Premium Puzzle
Benartzi, S., & Thaler, R. H. (1995) · The Quarterly Journal of Economics · doi:10.2307/2118511 · Cited by 2,487
Arbitrage Theory in Continuous Time
Björk, T. (2004) · doi:10.1093/0199271267.001.0001 · Cited by 940
60 Years of portfolio optimization: Practical challenges and current trends
Kolm, P. N., Tütüncü, R., & Fabozzi, F. J. (2014) · European Journal of Operational Research · doi:10.1016/j.ejor.2013.10.060 · Cited by 632
Who Should Buy Long-Term Bonds?
Campbell, J. Y., & Viceira, L. M. (2001) · American Economic Review · doi:10.1257/aer.91.1.99 · Cited by 616
Metadata
- Authors
- Merton, R. C.
- Venue
- The Review of Economics and Statistics
- Publisher
- JSTOR
- Published
- 1969-08
- Volume
- 51
- Issue
- 3
- Pages
- 247
- ISSN
- 0034-6535 (ISSN-L)
- OpenAlex
- W1984697146
- Cited by
- 5,187
- References
- 0
- FWCI
- 37.38
- Type
- journal article
- Language
- en
- Open access
- closed
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- Merton, R. C. (1969). Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case. The Review of Economics and Statistics. https://doi.org/10.2307/1926560
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