Expected Utility Maximization and Time Diversification

17 Pages Posted: 23 Oct 2000

See all articles by Mattias Persson

Mattias Persson

Sveriges Riksbank

Bjorn Hansson

Lund University - Department of Economics

Date Written: September 2000

Abstract

Time diversification continues to be a subject of intense debate within investment and academic communities. Among practitioners it not unusual to find the recommendation that an investor with a long investment horizon, should tilt the portfolio weights towards stocks. In this study, we analyze if the portfolio weights for stocks and bills, which are formed on the basis of direct expected utility maximization for a set of utility functions, vary significantly with the investment horizon. We use a non-parametric bootstrap approach, which allow us to draw inference about the optimal weights for different investment horizons. Through this approach we are also able to study the effect of estimation risk. Our analysis shows that investors with long investment horizons should invest more heavily in stocks, that is, we find that the weights for stocks are significantly higher for long horizon investment as compared to the one-year horizon. We conclude that time diversification exists, and that the allocation decision seems to be independent of the utility function.

Suggested Citation

Persson, Mattias and Hansson, Bjorn, Expected Utility Maximization and Time Diversification (September 2000). EFMA 2000 Athens. Available at SSRN: https://ssrn.com/abstract=243728 or http://dx.doi.org/10.2139/ssrn.243728

Mattias Persson (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE- 103 37 Stockholm
Sweden

Bjorn Hansson

Lund University - Department of Economics ( email )

P.O. Box 7082
S-220 07 Lund
Sweden
+46462228668 (Phone)
+46462224118 (Fax)

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