Mats Broden

Portfolio Optimization at Fixed Transaction Days

Abstract
In classical continuous time portfolio optimization the portfolio is
rebalanced at every time instant. The assumption that trading can take
place continuously in time is not very realistic, since this would lead to
ruin in the presence of transaction costs. In practice one would expect
investors to rebalance their portfolios at discrete points in time.

In this thesis we will set up a model only allowing the investors to
rebalance their portfolios at certain prescribed discrete points in time.
Then we investigate the differences, in expected utility and optimal
trading strategies, between the continuous and discrete model.

It turns out that for a reasonable choice of model parameters the
difference between the two models is of moderate magnitude even for
portfolios with a rebalancing period of one year.

Furthermore, we present a method for calculating the expected utility of
the discretely rebalanced portfolio in the presence of proportional
transaction costs.