Optimal portfolio and consumption subject to multidimensional economic factors

SUMMARY In this paper we consider a model for a portfolio comprising a bond and N stocks, which are affected by M economic factors. We formulate an equation for the wealth to encompass instantaneous fraction of wealth invested in the bond and the equities and seek to optimize the utility of the terminal wealth and instantaneous consumption. We illustrate the results by considering an example for a portfolio with one bond, one stock, and one economic factor, namely the gross domestic product. Copyright © 2011 John Wiley & Sons, Ltd.