Dynamic growth-optimum portfolio choice under risk control

Abstract: This paper studies a mean-risk portfolio choice problem for log-returns in a continuous-time, complete market. This is a growth-optimal problem with risk control. The risk of log-returns is measured by weighted Value-at-Risk (WVaR), which is a generalization of Value-at-Risk (VaR) and Expected Shortfall (ES). We characterize the optimal terminal wealth up to the concave envelope of a certain function, and obtain analytical expressions for the optimal wealth and portfolio policy when the risk is measured by VaR or ES. In addition, we find that the efficient frontier is a concave curve that connects the minimum-risk portfolio with the growth optimal portfolio, as opposed to the vertical line when WVaR is used on terminal wealth. Our results advocate the use of mean-WVaR criterion for log-returns instead of terminal wealth in dynamic portfolio choice.