Portfolio Construction with Gaussian Mixture Returns and Exponential Utility via Convex Optimization

DOI10.1007/S11081-023-09814-YMaRDI QIDQ6398693zbMATH OpenOpenAlexFDO

Authors Eric Luxenberg, Stephen W. Boyd

Publication date 9 May 2022

Full work available at URL https://doi.org/10.1007/s11081-023-09814-y

Mathematics Subject Classification ID

Operations research, mathematical programming (90-XX) Mathematical programming (90Cxx) Mathematical economics (91Bxx)

Abstract: We consider the problem of choosing an optimal portfolio, assuming the asset returns have a Gaussian mixture (GM) distribution, with the objective of maximizing expected exponential utility. In this paper we show that this problem is convex, and readily solved exactly using domain-specific languages for convex optimization, without the need for sampling or scenarios. We then show how the closely related problem of minimizing entropic value at risk can also be formulated as a convex optimization problem.

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