Optimal Asset Allocation Across Investment Horizons

Abstract

We investigate the optimal portfolio mix of bonds and stocks across investment horizons. Sharpe ratios are computed using simulated returns for portfolios ranging from 100% bonds to 100% stocks where the portfolio mix is varied in increments of five percentage points. Holding periods from one to 25 years are examined under alternate return correlation assumptions. The optimal mix of bonds and stocks is identified as the portfolio with the highest Sharpe ratio for each holding period. The results show that optimal asset allocation varies across investment horizons and depends on whether security returns are independent or autocorrelated. If returns are independent over time, the weight of bonds increases as the investment horizon lengthens. If returns are autocorrelated over time, the weight of stocks increases as the investment horizon grows longer.

Keywords: Sharpe ratio, Investment Horizon, autocorrelation

JEL Classification: G11