The structure of optimal portfolio strategies for continuous time markets
Provides a theoretical foundation for portfolio simplification in incomplete markets, benefiting investors and financial economists.
The paper demonstrates that near-optimal portfolio strategies for continuous-time markets with many risky assets can be constructed using a limited number of mutual funds, achieving dimension reduction via a relaxed Mutual Fund Theorem.
The paper studies problem of continuous time optimal portfolio selection for a incom- plete market diffusion model. It is shown that, under some mild conditions, near optimal strategies for investors with different performance criteria can be constructed using a limited number of fixed processes (mutual funds), for a market with a larger number of available risky stocks. In other words, a dimension reduction is achieved via a relaxed version of the Mutual Fund Theorem.