International Journal of Business and Economics Volume 10, No. 3 December, 2011

Portfolio Selections with Innate Learning Ability

Jin-Ray Lu

Department of Finance, National Dong Hwa University, Taiwan

Chih-Ming Chan

Department of Finance, National Chung Cheng University, Taiwan

Wen-Shen Li

Department of Finance, National Dong Hwa University, Taiwan

Abstract

This study explores how innate learning ability changes portfolio selection decision-making in a continuous-time framework. We re-solve Samuelson-Merton's portfolio choice problem framed in a fixed investment opportunity set for an individual with a learning ability. In contrast to traditional theoretical results, we suggest that risk-averse investors with a risk-cognitive ability hold a lower fraction of risky stocks to hedge against the jump risk and volatility risk since the investors are cognizant of the market risks. In addition, an individual whose learning process correlates strongly with stock movements would be likely to invest more in stocks.

Keywords：learning, asset allocation, cognition.

JEL Classifications：G11, C61.

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