Investment Horizon Effect on Asset Allocation between Value and Growth Strategies

31 Pages Posted: 20 Apr 2010

See all articles by Francis Haeuck In

Francis Haeuck In

Monash University - Department of Accounting; Financial Research Network (FIRN)

Sangbae Kim

Kyungpook National University - School of Business Administartion

Ramazan Gencay

Simon Fraser University

Date Written: April 18, 2010

Abstract

How does the optimal risk exposure of assets change as their investment horizons increase? Does this impact investment portfolio decision-making, in particular, optimal asset allocation between value and growth strategies over various investment horizons? This paper adopts a new approach to address these questions by examining portfolio allocation between value and growth stocks over various investment horizons. This new approach is based on wavelet analysis, which decomposes the returns of a particular investment strategy across multiple investment horizons. The key empirical results show that the success of pursuing the value strategy (short-selling growth stocks and going long on value stocks) is impacted by the approach used to classify value and growth stock returns. We explore two common alternatives: Fama-French versus Standard & Poor’s (S&P) 500/Barra portfolios. The results using Fama-French portfolios show that as the investment horizon increases, the optimal mean allocation of investors tilts heavily away from growth stocks, particularly for lower and moderate levels of risk aversion. Interestingly, for S&P 500/Barra portfolios the allocation weights between value and growth do not vary much.

Keywords: Asset allocation, value stocks, growth stocks, investment horizon, wavelet analysis

JEL Classification: G10, G12

Suggested Citation

In, Francis Haeuck and Kim, Sangbae and Gencay, Ramazan, Investment Horizon Effect on Asset Allocation between Value and Growth Strategies (April 18, 2010). Available at SSRN: https://ssrn.com/abstract=1592749 or http://dx.doi.org/10.2139/ssrn.1592749

Francis Haeuck In (Contact Author)

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia
+61 3 9905 1561 (Phone)
+61 3 9905 5475 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Sangbae Kim

Kyungpook National University - School of Business Administartion ( email )

Daegu 702-701, Taegu
Korea, Republic of (South Korea)
+82 53 950 7413 (Phone)
+82 53 950 6247 (Fax)

Ramazan Gencay

Simon Fraser University ( email )

Department of Economics
8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

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