Optimal capital allocation in correlated mutual funds under exponential loss utility

Nontawat Bunchak; Udomsak Rakwongwan; Phiraphat Sutthimat; Walailuck Chavanasporn

doi:10.1117/12.2675080

10 April 2023 Optimal capital allocation in correlated mutual funds under exponential loss utility

Nontawat Bunchak, Udomsak Rakwongwan, Phiraphat Sutthimat, Walailuck Chavanasporn

Proceedings Volume 12616, International Conference on Mathematical and Statistical Physics, Computational Science, Education, and Communication (ICMSCE 2022); 1261609 (2023) https://doi.org/10.1117/12.2675080
Event: International Conference on Mathematical and Statistical Physics, Computational Science, Education, and Communication (ICMSCE 2022), 2022, Istanbul, Turkey

Abstract

Mutual funds are companies which pool money from investors and invest it in securities such as stocks, bonds, and commodities. In this work, we apply the portfolio optimization model where an investor’s risk is measured by the exponential loss function to obtain the optimal allocation of wealth in mutual funds. We consider six correlated mutual funds investing in stocks, oil, gold, and Bitcoin. Based on parameters calibrated using the historical data, the numerical result suggests that one should go long in the funds investing in oil, gold, Thai stocks, and global stocks and go short in Bitcoin and US stocks. The biggest proportion of capital is allocated to oil. In addition, we study the effects of the modelling parameters and risk aversion factors on the optimized portfolio and the backtesting of the strategy on the historical data.

Citation Download Citation

Nontawat Bunchak, Udomsak Rakwongwan, Phiraphat Sutthimat, and Walailuck Chavanasporn "Optimal capital allocation in correlated mutual funds under exponential loss utility", Proc. SPIE 12616, International Conference on Mathematical and Statistical Physics, Computational Science, Education, and Communication (ICMSCE 2022), 1261609 (10 April 2023); https://doi.org/10.1117/12.2675080

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