Volume 16 | Issue 4 | Article 4
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Risk Minimizing Portfolio Optimization and Hedging with Conditional Value-at-Risk
We look at the problem of how to find a dynamic optimal portfolio so that the Conditional Value-at-Risk (CVaR) is minimized under the condition where the returns are bounded. CVaR is a coherent risk measure based on the popular VaR. In a complete market setting, we derive the exact optimal conditions. Then we provide applications in two classic complete market models: the Binomial model and the Black-Scholes model. In these cases, the procedures to find the optimal strategies are given with exact formulas. Numerical results show, as expected, dynamic portfolios provide much lower CVaR risk than static portfolios.
