Groupe d’études et de recherche en analyse des décisions


Goal Achieving Probabilities of Cone-Constrained Mean-variance Portfolios


In this paper, we establish closed-form formulas for key probabilistic properties of the cone-constrained optimal mean-variance strategy, in a continuous market model driven by a multidimensional Brownian motion and deterministic coefficients. In particular, we compute the probability to get to a point, during the investment horizon, where the accumulated wealth is large enough to be fully reinvested in the money market, and safely grow there to meet the investor's financial goal at terminal time. We conclude that the result of Li and Zhou [Ann. Appl. Prob., 16, 1751-1763, 2006] in the unconstrained case carries over when conic constraints are present: the above probability is lower bounded by 80% no matter the market coefficients, trading constraints, and investment goal. We also compute the expected terminal wealth given that the investor's goal is underachieved, for both the mean-variance strategy and the aforementioned hybrid strategy where transfer to the money market occurs if it allows to safely achieve the goal. The above probabilities and expectations are also provided in the case where all risky assets held are liquidated if financial distress is encountered. These results provide investors with novel practical tools to support portfolio decision making and analysis.

, 34 pages