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In this paper, we investigate an optimal stopping problem (mixed with stochastic controls) for a manager whose utility is *nonsmooth and nonconcave* over a finite time horizon. The paper aims to develop a new methodology, which is significantly different from those of mixed dynamic optimal control and stopping problems in the existing literature, so as to figure out the manager's best strategies. The problem is first reformulated into a free boundary problem with a fully *nonlinear* operator. Then, by means of a dual transformation, it is further converted into a free boundary problem with a *linear* operator, which can be consequently tackled by the classical method. Finally, using the inverse transformation, we obtain the properties of the optimal trading strategy and the optimal stopping time for the original problem.

This study addresses an investment problem facing a venture fund manager who has a non-smooth utility function. The theoretical model characterizes an absolute performance-based compensation package. Technically, the research methodology features stochastic control and optimal stopping by formulating a free-boundary problem with a nonlinear equation, which is transferred to a new one with a linear equation. Numerical results based on simulations are presented to better illustrate this practical investment decision mechanism.

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