Dynamic portfolio choice without cash

Chi Kin Lam, Yuhong Xu, Guosheng Yin

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)


We consider the dynamic mean–variance portfolio choice without cash under a game theoretic framework. The mean–variance criterion is investigated in the situation where an investor allocates the wealth among risky assets while keeping no cash in a bank account. The problem is solved explicitly up to solutions of ordinary differential equations by applying the extended Hamilton–Jacobi–Bellman equation system. Given a constant risk aversion coefficient, the optimal allocation without a risk-free asset depends linearly on the current wealth, while that with a risk-free asset turns out to be independent of the current wealth. We also study the minimum-variance criterion, which can be viewed as an extension of the mean–variance model when the risk aversion coefficient tends to infinity. Calibration exercises demonstrate that for large investments, the mean–variance model without cash yields the highest certainty equivalent return for both short-term and long-term investments. Furthermore, the mean–variance portfolio choices with and without cash yield almost the same Sharpe ratio for an investment with large initial wealth.

Original languageEnglish
Pages (from-to)313-326
Number of pages14
JournalQuantitative Finance
Issue number2
Publication statusPublished - 1 Feb 2019
Externally publishedYes


  • C61
  • Dynamic asset allocation
  • Equilibrium control
  • G11
  • Mean–variance portfolio selection
  • Time inconsistency


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