Utility maximization under a shortfall risk constraint

The article analyzes optimal portfolio choice of utility maximizing agents in a general continuous-time financial market model under a joint budget and downside risk constraint. The risk constraint is given in terms of a class of convex risk measures. We do not impose any specific assumptions on the price processes of the underlying assets. We analyze under which circumstances the risk constraint is binding. We provide a closed-form solution to the optimization problem in a general semimartingale framework. For a complete market, the wealth maximization problem is equivalent to a dynamic portfolio optimization problem.

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