Optimal Portfolio Policies with Borrowing and Shortsale Constraints

The author characterizes optimal intertemporal portfolio policies for investors with CRRA utility facing either a borrowing constraint, or shortsale restrictions, or both. The optimal constrained portfolios are identified as optimal unconstrained portfolios for a higher riskless rate, or for a subset of the risky assets, or for a combination of the two settings. The author's characterization is based on duality results in Cvitanic and Karatzas (1992) for optimal portfolio investment when portfolio values are more generally constrained to a closed, convex, nonempty subset of R[superscript n].