EXTREMAL BEHAVIOR OF LONG-TERM INVESTORS WITH POWER UTILITY

Abstract

We consider a Bayesian financial market with one bond and one stock where the aim is to maximize the expected power utility from terminal wealth. The solution of this problem is known, however there are some conjectures in the literature about the long-term behavior of the optimal strategy. In this paper, we prove that for positive coefficient in the power utility the long-term investor is very optimistic and behaves as if the best drift has been realized. In case the coefficient in the power utility is negative the long-term investor is very pessimistic and behaves as if the worst drift has been realized.