The Portfolio Optimizationfor Commercial Banks under Constant Elasticity of Variance Model

Abstract

Following the recent happening in the world due to the negative effect of Corona virus on the economies of the nations and financial markets, there is need for commercial banks to develop an investment plan which is robust and take into consideration the volatility of the risky assets during investment. Based on this, we study the optimal investment portfolio strategies for a commercial bank with exponential utility under constant elasticity of variance (CEV) model. A portfolio consisting of one risk free asset (treasury security) and two risky assets (marketable security and a loan) such that the risky assets are modelled by CEV model. By using power transformation, change of Variable approach, we obtain explicit solutions of the optimal investment portfolio strategies and the Value function. Furthermore, we obtained the bank’s total assets, deposits and capital with numerical simulations.