Dynamic financial planning: certainty equivalents, stochastic constraints and functional conjugate duality

This paper studies portfolios under risk and stochastic constraints. Certainty equivalents combine risk aversion and exponential utility to form the objective. Budget and stochastic constraints on the account balance are used to ensure a positive net worth over time. These portfolio models are analyzed by functional conjugate duality for general distributions and by conjugate duality for the normal distribution. All the programs are convex. The duals provide insight into this approach and relate it to other stochastic and financial concepts.
1. Introduction One of the major thrusts in financial engineering is the management and optimization of risky portfolios. Although this is a well-researched area (Merton, 1990), it is still a [...]