Optimal Value And Growth Tilts In Long-Horizon Portfolios

Topics:
Investment Strategy
Tags:
Finance,
Financial Accounting,
Financial Services,
Harvard College,
Investment,
Investment Opportunity
Source:
President and Fellows of Harvard College

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Overview: We develop an analytical solution to the dynamic portfolio choice problem of an investor with power utility defined over wealth at a finite horizon who faces an investment opportunity set with time-varying risk premia, real interest rates and inflation. The variation in investment opportunities is captured by a flexible vector autoregressive parameterization, which readily accommodates a large number of assets and state variables. We find that the optimal dynamic portfolio strategy is an affine function of the vector of state variables describing investment opportunities, with coefficients that are a function of the investment horizon. We apply our method to the optimal portfolio choice problem of an investor who can choose between value and growth stock portfolios, and among these equity portfolios plus bills and bonds.

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Format: PDF | Size: 735KB | Date: Jul 2006 | Pages: 62

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