Worst-Case Portfolio Optimization: Concept and Recent Results

Worst-case portfolio optimization has been introduced in Korn and Wilmott

(2002) and is based on distinguishing between random stock price

fluctuations and market crashes which are subject to Knightian

uncertainty. Due to the absence of full probabilistic information, a

worst-case portfolio problem is considered that will be solved completely.

The corresponding optimal strategy is of a multi-part type and makes an

investor indifferent between the occurrence of the worst possible crash

and no crash at all.

We will consider various generalizations of this setting and - as a very

recent result - will in particular answer the question "Is it good to save

for bad times or should one consume more as long as one is still rich?"