ابوذر بازیاری

In this paper, we obtain a closed-form solution for a diffusion risk model which optimally allocates his/her wealth among the following coffecients: a risky asset, a free bank account, and a stock. The following relationships between the optimal amount invested in the security and the risk premium are obtained: (i) for a risk premium greater than one, the investor will optimally invest a positive amount in the bond, and (ii) for a risk premium equal to one, the insurance company will optimally invest nothing in the bond. Although the inclusion of a credit-related financial product in the portfolio selection if risk models is more realistic, no closed-form solutions to date are given in the literature when a recovery value is considered in the event of a default. We solve the optimal portfolio problem of insurance company for the representative investor with a specified utility function. Moreover, the implications of the analytic result for asset allocation are discussed and carried out sensitivity analysis by adopting benchmark parameter values.