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A Note on Finding the Optimal Allocation Between a Risky Stock and a Risky Bond
 

Summary: A Note on Finding the Optimal Allocation Between
a Risky Stock and a Risky Bond
John E. Angus
Department of Mathematics
Claremont Graduate University
August 28, 2001
Abstract
The allocation of ̃nancial assets among securities with different levels of
risk is an essential topic in the study, analysis, and strategic use of derivative
securities and markets. In a recent paper, Browne [1] determined the optimal
allocation strategy for dividing investments between a risky stock and a risky
bond. In this note, Browne's equation determining the optimal strategy is stud-
ied and some methods are described for solving it. In addition, some useful
rules-of-thumb, computational methods, and approximation techniques are pre-
sented.
1. Introduction
The optimal strategy for the allocation of ̃nancial assets among competing securities
with different levels of risk is a matter of both practical and academic interest. In
fact, optimal portfolio selection methods, along with derivative security pricing, have
occupied a large part of the applied and theoretical literature in quantitative ̃nance

  

Source: Angus, John - School of Mathematical Sciences, Claremont Graduate University

 

Collections: Mathematics