Asset Allocation in Continuous Time: Optimal Investing
In the one-period portfolio models like Markowitz and CAPM, you make your investment decision once and then sit and wait. You cannot change your mind. But in real life, you check your portfolio, see how the market moved, and rebalance. You do this every day, every hour, maybe every minute. Chapter 66 of Wilmott’s book, based mostly on Merton’s work, develops the theory of continuous-time investment and portfolio rebalancing. The results are surprisingly elegant and give genuine practical insight.