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Beliefs regarding fundamental value and optimal investing

Cornell, Bradford and Cvitanić, Jakša and Goukasian, Levon (2010) Beliefs regarding fundamental value and optimal investing. Annals of Finance, 6 . pp. 83-105. ISSN 1614-2446. doi:10.1007/s10436-009-0133-y.

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Standard optimal portfolio selection models take no account of the special information that active investors believe they possess. For example, active investors who believe they can place bounds on the price of a security will want to use that information when assessing risk and expected return in order to construct an optimal portfolio. In this paper, we use two continuous-time models to analyze how placing boundaries on the price of a stock affects assessed risk, expected returns, and the optimal holdings of an active investor, and how those vary as a function of the relation between the stock price and the boundaries. In particular, the optimal strategy takes significant long/short positions as the price nears its lower/upper boundary.

Item Type:Article
Related URLs:
URLURL TypeDescription ReadCube access
Cvitanić, Jakša0000-0001-6651-3552
Additional Information:© 2009 Springer-Verlag. The previous version of this paper was circulated under the title “Optimal investing with perceived mispricing”. J.C.’s research supported in part by NSF grants DMS 04-03575 and DMS 06-31298, and through the Program “GUEST” of the National Foundation For Science, Higher Education and Technological Development of the Republic of Croatia.
Funding AgencyGrant Number
NSFDMS 04-03575
NSFDMS 06-31298
National Foundation For Science, Higher Education and Technological Development (Croatia)UNSPECIFIED
Subject Keywords:Investor beliefs; Mispricing; Optimal portfolios; Range reversion; Risk premium
Classification Code:JEL Classification: G11
Record Number:CaltechAUTHORS:20190821-103126134
Persistent URL:
Official Citation:Cornell, B., Cvitanić, J. & Goukasian, L. Ann Finance (2010) 6: 83.
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:98073
Deposited By: Tony Diaz
Deposited On:21 Aug 2019 20:14
Last Modified:16 Nov 2021 17:36

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