A class of log-optimal utility functions

Paul Cuff

doi:10.1109/ITA.2012.6181818

A class of log-optimal utility functions

Paul Cuff

Electrical and Computer Engineering

Research output: Chapter in Book/Report/Conference proceeding › Conference contribution

1 Scopus citations

Abstract

One of the classic observations in investment theory is that maximizing the expected-log-return of a portfolio results in the greatest long-term growth of wealth. The log-optimal portfolio is both competitively optimal and pathwise dominant. Nevertheless, investment researchers and practitioners don't all latch on to the log-optimal doctrine, even for theoretical guidance. A common alternative is to use a utility function to evaluate an investment strategy. At first glance it seems that any (non-decreasing) utility function would point to the log-optimal portfolio, at least in the limit. This is known not to be the case. In this work we identify sufficient conditions on a utility function that will produce a happy marriage between utility theory and optimal growth-rate of wealth.

Original language	English (US)
Title of host publication	2012 Information Theory and Applications Workshop, ITA 2012 - Conference Proceedings
Pages	62-63
Number of pages	2
DOIs	https://doi.org/10.1109/ITA.2012.6181818
State	Published - 2012
Event	2012 Information Theory and Applications Workshop, ITA 2012 - San Diego, CA, United States Duration: Feb 5 2012 → Feb 10 2012

Publication series

Name	2012 Information Theory and Applications Workshop, ITA 2012 - Conference Proceedings

Other

Other	2012 Information Theory and Applications Workshop, ITA 2012
Country/Territory	United States
City	San Diego, CA
Period	2/5/12 → 2/10/12

All Science Journal Classification (ASJC) codes

Computer Science Applications
Information Systems

Access to Document

10.1109/ITA.2012.6181818

Cite this

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abstract = "One of the classic observations in investment theory is that maximizing the expected-log-return of a portfolio results in the greatest long-term growth of wealth. The log-optimal portfolio is both competitively optimal and pathwise dominant. Nevertheless, investment researchers and practitioners don't all latch on to the log-optimal doctrine, even for theoretical guidance. A common alternative is to use a utility function to evaluate an investment strategy. At first glance it seems that any (non-decreasing) utility function would point to the log-optimal portfolio, at least in the limit. This is known not to be the case. In this work we identify sufficient conditions on a utility function that will produce a happy marriage between utility theory and optimal growth-rate of wealth.",

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Cuff, P 2012, A class of log-optimal utility functions. in 2012 Information Theory and Applications Workshop, ITA 2012 - Conference Proceedings., 6181818, 2012 Information Theory and Applications Workshop, ITA 2012 - Conference Proceedings, pp. 62-63, 2012 Information Theory and Applications Workshop, ITA 2012, San Diego, CA, United States, 2/5/12. https://doi.org/10.1109/ITA.2012.6181818

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AB - One of the classic observations in investment theory is that maximizing the expected-log-return of a portfolio results in the greatest long-term growth of wealth. The log-optimal portfolio is both competitively optimal and pathwise dominant. Nevertheless, investment researchers and practitioners don't all latch on to the log-optimal doctrine, even for theoretical guidance. A common alternative is to use a utility function to evaluate an investment strategy. At first glance it seems that any (non-decreasing) utility function would point to the log-optimal portfolio, at least in the limit. This is known not to be the case. In this work we identify sufficient conditions on a utility function that will produce a happy marriage between utility theory and optimal growth-rate of wealth.

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A class of log-optimal utility functions

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