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Quantitative Finance > Portfolio Management

arXiv:2503.07498 (q-fin)
[Submitted on 10 Mar 2025]

Title:Optimal Diversification and Leverage in a Utility-Based Portfolio Allocation Approach

Authors:Vladimir Markov
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Abstract:We examine the problem of optimal portfolio allocation within the framework of utility theory. We apply exponential utility to derive the optimal diversification strategy and logarithmic utility to determine the optimal leverage. We enhance existing methodologies by incorporating compound probability distributions to model the effects of both statistical and non-stationary uncertainties. Additionally, we extend the maximum expected utility objective by including the variance of utility in the objective function, which we term generalized mean-variance. In the case of logarithmic utility, it provides a natural explanation for the half-Kelly criterion, a concept widely used by practitioners.
Subjects: Portfolio Management (q-fin.PM); General Economics (econ.GN)
Cite as: arXiv:2503.07498 [q-fin.PM]
  (or arXiv:2503.07498v1 [q-fin.PM] for this version)
  https://doi.org/10.48550/arXiv.2503.07498

Submission history

From: Vladimir Markov [view email]
[v1] Mon, 10 Mar 2025 16:14:43 UTC (31 KB)
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