Munich Personal RePEc Archive

On the Effect of Premia and Penalties on the Optimal Portfolio Choice

Currarini, Sergio and Marini, Marco A. (2012): On the Effect of Premia and Penalties on the Optimal Portfolio Choice. Published in: International Journal of Contemporary Mathematical Sciences , Vol. 47, No. 7 (October 2012): pp. 2341-2344.

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Abstract

In a standard portfolio choice between a risky and a safe asset, we study the effect of imposing premia and penalties conditional on the realized return of the portfolio meeting a given threshold. We show that thresholds set at ”intermediate levels” have the effect to increase the optimal share of the safe asset, while very low and very high thresholds may induce larger shares of the risky investment if a condition on the curvature of the utility function holds.

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