Dynamic portfolio selection with maximum absolute deviation model

Abstract In this paper, we present a new multiperiod portfolio selection model with maximum absolute deviation model. The investor is assumed to seeks an investment strategy to maximize his/her terminal wealth, and minimize the total risk in all periods. Different with original consideration that risk is defined as the variance of terminal wealth, in our paper, the total risk is defined as the average of the sum of maximum absolute deviation of all assets in all periods. At the same time, noticing that the risk during the period is so high that the investor may go bankruptcy, a maximum risk level is given in every period. By introducing an auxiliary problem, we deduce the optimal strategy via the dynamic programming method.