Optimal Asset Allocation Across Investment Horizons

21 Pages Posted: 1 Feb 2015

See all articles by Ronald W. Best

Ronald W. Best

State University of West Georgia

Charles W. Hodges

University of West Georgia; Southern Illinois University at Carbondale - Department of Finance; Georgia State University - Department of Finance

James A. Yoder

University of West Georgia

Date Written: January 30, 2015

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

Suggested Citation

Best, Ronald Wade and Hodges, Charles W. and Yoder, James A., Optimal Asset Allocation Across Investment Horizons (January 30, 2015). Available at SSRN: https://ssrn.com/abstract=2558207 or http://dx.doi.org/10.2139/ssrn.2558207

Ronald Wade Best

State University of West Georgia ( email )

Carrollton, GA 30118
United States
770-836-6469 (Phone)

Charles W. Hodges (Contact Author)

University of West Georgia ( email )

Department of Accounting and Finance
Richards College of Business
Carrollton, GA 30118
United States
(770) 836-4816 (Phone)

Southern Illinois University at Carbondale - Department of Finance ( email )

Mail Code 4626
Carbondale, IL 62901-4626
United States

Georgia State University - Department of Finance ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-2691 (Phone)
404-651-2630 (Fax)

James A. Yoder

University of West Georgia ( email )

1601 Maple Street
Carrollton, GA 30118
United States

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