The Effect of Current Expected Variance of Return on Future Trading Optimal Strategy

Abstract

Due to the presence of transaction cost, most investors do not keep changing their portfolio to an optimal portfolio over time. This paper adopts a new approach to investigate the linkages between current optimal portfolio variance and the expected future portfolios variances. It is given a closed-form solution for optimal dynamic portfolio selection with trading cost; considering the minimum variance of the utility function as an optimal or selected portfolio by an investor for any period of time based on Gârleanu & Pedersen (2013) framework. Finally, we introduce the multi-period portfolio model based on CRRA preference utility function.

Keywords: multiperiod portfolio selection, higher-order moments, CRRA utility function, optimal wealth changes