Optimal capital allocation in correlated mutual funds under exponential loss utility

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.