Dynamic Portfolio Choice

59 Pages Posted: 11 Jul 2012  

Andrew Ang

BlackRock, Inc

Date Written: July 11, 2012

Abstract

The foundation for a long-term investment strategy is rebalancing to fixed asset class positions, which are determined in a one-period portfolio choice problem where the asset weights reflect the investor’s attitude toward risk. Rebalancing is a counter-cyclical strategy that has worked well even during the Great Depression in the 1930s and during the Lost Decade of the 2000s. Rebalancing goes against investors' behavioral tendencies and is also a short volatility strategy. When there are liabilities and asset returns vary over time, the long-term investor’s optimal portfolio consists of (i) a liability-hedging portfolio, (ii) a market (or myopic demand) portfolio that reflects optimal short-run asset positions, and (iii) an opportunistic (or long-term hedging demand) portfolio that allows a long-run investor to take advantage of changing investment returns.

Keywords: Rebalancing, Long-horizon investing, Diversification return, Kelly rule, Ulysses contract, Short volatility strategy

JEL Classification: G11, G12, G13

Suggested Citation

Ang, Andrew, Dynamic Portfolio Choice (July 11, 2012). Available at SSRN: https://ssrn.com/abstract=2103734 or http://dx.doi.org/10.2139/ssrn.2103734

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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