Author(s) :

Silas A. Ihedioha.

Volume/Issue :

Abstract :

This work studied the optimal investment strategy for an investor under Modified Constant Elasticity of Variance (M- CEV) and Ornstein-Uhenbeck models. The stock price is assumed to be governed by the M-CEV model and the goal is to find the optimal investment strategy where the investor has a power utility preference when the Brownian motions do not and do correlate. The application of maximum principle of dynamic programming helped us to obtain the required Hamilton-Jacobi-Bellman (HJB) equation. The method elimination of variable dependency was applied to transform the second order partial differential equation to an ordinary differential equation from which the close form solution of the optimal investment strategy was obtained. It is found that the investor’s optimal strategy when the Brownian motions correlate is less than the investor’s optimal investment strategy when the Brownian motions do not correlate by a fraction of the total wealth.

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