Abstract: This paper presents an application of risk sensitive control theory in financial decision making. Specifically, optimal, risk-sensitive investment strategies are determined for a long-term investor who is interested in optimal allocation of her/his capital between cash, various equities, fixed income instruments, and the like. The long-term fixed income instruments used are so called rolling-horizon bonds. In order to construct the optimal risk-sensitive control policies relevant for the present application we advance the risk sensitive control theory developed in previous papers.

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