Browsing by Subject "Ellipsoidal uncertainty on mean returns"

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    The robust Merton problem of an ambiguity averse investor
    (Springer, 2017) Biagini, S.; Pınar, M. Ç.
    We derive a closed form portfolio optimization rule for an investor who is diffident about mean return and volatility estimates, and has a CRRA utility. Confidence is here represented using ellipsoidal uncertainty sets for the drift, given a (compact valued) volatility realization. This specification affords a simple and concise analysis, as the agent becomes observationally equivalent to one with constant, worst case parameters. The result is based on a max–min Hamilton–Jacobi–Bellman–Isaacs PDE, which extends the classical Merton problem and reverts to it for an ambiguity-neutral investor.