Modern Portfolio Theory, Digital Portfolio Theory and Intertemporal Portfolio Choice
American Journal of Industrial and Business Management, 2017, 7, 833-854
17 Pages Posted: 22 Apr 2017 Last revised: 14 Aug 2017
Date Written: April 18, 2017
The paper compares three portfolio optimization models. Modern portfolio theory (MPT) is a short-horizon volatility model. The relevant time horizon is the sampling interval. MPT is myopic and implies that investors are not concerned with long-term variance or mean-reversion. Intertemporal portfolio choice is a multiple period model that revises portfolios continuously in response to relevant signals to reduce variance of terminal wealth over the holding period. Digital portfolio theory (DPT) is a non-myopic, discrete time, long-horizon variance model that does not include volatility. DPT controls mean-reversion variances in single period solutions based on holding period and hedging and speculative demand.
Keywords: portfolio theory, portfolio choice, portfolio optimization, long-horizon risk, mean-reversion risk, asset allocation, digital signal processing, Fourier transform, portfolio management, discrete time and continuous time, hedging and speculative demand, systematic and unsystematic risk
JEL Classification: G11, C44, C61, C1
Suggested Citation: Suggested Citation