Abstract

http://ssrn.com/abstract=777265
 
 

References (5)



 


 



On the Time Dimension of Investing


Zvi Bodie


Boston University - Department of Finance & Economics

August 2, 2005

Boston University School of Management Working Paper No. 2005-28

Abstract:     
This paper explores how to structure choices for personal investment accounts that have a well-defined set of target dates. Key examples are investing for retirement or for a child's college education. We show that if the investor's objective is to minimize the ex ante cost of hitting specific targets at specific dates, the optimal portfolio strategy is to match the portfolio's payoffs to the time profile of those targets and not take any risk. Therefore to accommodate risk-averse investors with diverse time horizons, financial institutions ought to provide their clients with a term structure of risk-free investments to serve as clear points of reference.

In structuring choices with different degrees of risk and reward, an important set of reference points is a term structure of exchange-traded index options and the corresponding set of implied volatilities. In framing the time dimension in this fashion, one avoids the need for explicit forecasts of the term structure of equity risk premia, which are notoriously difficult to forecast. Our approach is not vulnerable to the potential biases inherent in the use of historical time series, such as survivorship bias.

Our approach and the mean-variance efficient frontier approach should be seen as complements rather than as substitutes. We view ours as a natural first step in structuring the time dimension of investment choice in personal investment accounts. Subsequent steps should include econometric modeling and some kind of tailoring to the preferences and circumstances of the end user.

Number of Pages in PDF File: 9

Keywords: matching, efficient diversification, term structure, implied volatility

JEL Classification: G11

working papers series


Download This Paper

Date posted: August 16, 2005  

Suggested Citation

Bodie, Zvi, On the Time Dimension of Investing (August 2, 2005). Available at SSRN: http://ssrn.com/abstract=777265 or http://dx.doi.org/10.2139/ssrn.777265

Contact Information

Zvi Bodie (Contact Author)
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-4160 (Phone)
617-353 6667 (Fax)
HOME PAGE: http://smgnet.bu.edu/mgmt/profiles/BodieZvi.html
Feedback to SSRN


Paper statistics
Abstract Views: 1,706
Downloads: 554
Download Rank: 25,271
References:  5

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo3 in 0.922 seconds