Merton's portfolio problem is a problem in continuous-time finance and in particular intertemporal portfolio choice. An investor must choose how much to consume and must allocate their wealth between stocks and a risk-free asset so as to maximize expected utility. The problem was formulated and solved by Robert C. Merton in 1969 both for finite lifetimes and for the infinite case.[1][2] Research has continued to extend and generalize the model to include factors like transaction costs and bankruptcy.
- ^ Merton, R. C. (1 August 1969). "Lifetime Portfolio Selection under Uncertainty: the Continuous-Time Case". The Review of Economics and Statistics. 51 (3): 247–257. doi:10.2307/1926560. ISSN 0034-6535. JSTOR 1926560.
- ^ Sethi, S.P. and Taksar, M.I., “A Note on Merton's 'Optimum Consumption and Portfolio Rules in a Continuous-Time Model,” Journal of Economic Theory, 46, 1988, 395-401.