Fund managers usually set aside certain amount of cash to pay for possible redemptions, and it is believed that this will affect overall fund performance. This paper examines the properties of efficient portfolios in the mean-variance framework in the presence of a cash account. We show that investors will retain part of funds in cash, as long as the required return is lower than the expected rerun on the portfolio corresponding to the point of intersection of the traditional efficient frontier and the straight line that passes through the minimum-variance portfolio and the origin in the mean-variance plane (portfolio q1 ). In addition, the efficient portfolios determined by our model are proportional to portfolio q1 , and are more efficient than traditional efficient portfolios. Using a simulation, we illustrate that 6% to 9% of total funds are to be retained in the cash account if no-short-selling constraint is imposed. Based on real data, our out-of-sample empirical results confirm the theoretical findings.

This paper investigates the impact of background risk on an investor’s portfolio choice in a mean–variance framework, and analyzes the properties of efficient portfolios as well as the investor’s hedging behavior in the presence of background risk. Our model implies that the efficient portfolio with background risk can be separated into two independent components: the traditional mean–variance efficient portfolio and a self-financing component constructed to hedge against background risk. Our analysis also shows that the presence of background risk shifts the efficient frontier of financial assets to the right with no changes in its shape. Moreover, both the composition of the hedge portfolio and the location of the efficient frontier are greatly affected by a number of background risk factors, including the proportion of background assets in total wealth and the correlation between background risk and financial risk.

The ignorance of market friction causes the invalid portfolio investment, and whether the arrangement of capital structure is reasonable will influence the income of funding cost, effective utilization of non-selfowned and funding risk level. Therefore, portfolio model under the assumption of complete market lacks of practically instructiveness. Capital structure factor and transaction cost do influence the portfolio decision in the capital market. On the basis of capital structure factor and transaction cost during the process of investment, this article improve the portfolio model that CVaR control proposed by Rockafeller and Uryasev, built a CVaR portfolio model with capital structure factor and transaction cost. Empirical studies indicates that the changes of capital structure factor and transaction cost lead to the movement of efficient frontier on CVaR portfolio model and the changes of upper and lower limit.

This paper studies sequential portfolio choices by MPS-risk-averse investors in a continuous time jump-diffusion framework. It is shown that the optimal trading strategies for MPS risk averse investors, if they exist, must be located on a so-called `temporal efficient frontier' (t.e.f.). The t.e.f. is found not to coincide with the local instantaneous frontier --- the continuous time analogue of Markowitz's mean-variance frontier. This observation is potentially useful in understanding the existence of documented financial anormally in empirical finance --- MPS risk averse investors may not wish to invest along the local instantaneous Markowitz's mean-variance frontier, but instead hold portfolios on the t.e.f.. The optimal portfolio on the t.e.f. could well fall strictly within the instantaneous local Markowitz's efficient frontier. Our observations on mutual fund separation are also profound and interesting. In contrast to the classical two-fund separation along the line of Black (1972) and Tobin (1958), our study shows that MPS-risk-averse investors' optimal trading strategy is target rate specific. Precisely, investors with different target rates may end up investing into different managed mutual funds, each involving a specific set of separating portfolios. Our theoretic findings are, nevertheless, much in line with the real world phenomena on the existence of various types of mutual funds offered by different financial institutes, each aiming to attract demand from some specific groups of investors --- a picture that is in sharp contrast to the theoretical prediction made by Black (1972) and Tobin (1958). Finally, our study sheds light on the difference between expected utility and MPS-risk-averse investors concerning their trading behavior in sequential time frame. Even though these two groups of investors may end up holding a common risky portfolio in each spot market, the differences between their trading behaviors are most reflected through the portfolio weights assigned to each of the separating portfolios within the time frame and across states. Precisely, the portfolio weights corresponding to investors respectively from the two groups are associated with recognizable different time patterns. We showed that such difference in trading behavior would be also reflected from the time patterns of the instantaneous returns and the volatilities of the funds respectively managed by investors from these two groups.