Calculation of Investment Portfolios with Risk Free Borrowing and Lending

The paper considers the problem of portfolio selection for a rish averting investor wishing to allocate his resources among several investment opportunities in order to maximize the expected utility of final wealth. When the investment returns are joint normally distributed and there is a riskless asset it is known that the investment proportions in the risky assets are independent of the utility function. These proportions are generally unique and may be obtained from the solution of a fractional program or a linear complementary problem. Given the investor's utility function the optimal investment proportions in all assets may be found by solving a stochastic program having one random variable and one decision variable. The two stage procedure provides an efficient computational scheme to solve large scale portfolio problems. Data on the major pooled Canadian equity pension funds was used to provide an empirical test of the suggested solution approach using several common utility function classes. (Author).