Optimal portfolio and consumption decisions for a «small investor» on a finite horizon

A general consumption/investment problem is considered for an agent whose actions cannot affect the market prices, and who strives to maximize total expected discounted utility of both consumption and terminal wealth. Under very general conditions on the nature of the market model and on the utility functions of the agent, it is shown how to approach the above problem by considering separately the two more elementary ones of maximizing utility of consumption only and of maximizing utility of terminal wealth only, and then appropriately composing them. The optimal consumption and wealth processes are obtained quite explicitly. In the case of a market model with constant coefficients, the optimal portfolio and consumption rules are derived very explicitly in feedback form (on the current level of wealth).