Suleyman Ozekici.  Portfolio Optimization in Markovian Markets
 

Abstract. We consider the multiperiod portfolio selection problem where the market
evolves randomly according to a Markov chain. The states of the market
describe the prevailing economic, financial, social and other conditions
that affect the deterministic and probabilistic parameters of the model.
This includes the distributions of the random asset returns as well as the
utility function. The problem is solved using dynamic programming to obtain
an explicit characterization of the optimal policy and the value function.
We also discuss the stochastic structure of the wealth process under the
optimal policy. The return-risk frontiers of the terminal wealth are shown
to have linear forms. An example is provided to illustrate the results.