Horizon Effects That Are Larger than You Think: Dynamic Allocation with a Representative Investor
Journal of Investment Management, No. 2, 2017, 39-50
26 Pages Posted: 9 Jul 2016 Last revised: 24 Feb 2019
Date Written: February 5, 2019
This paper illustrates optimal dynamic allocation in a traditional two-fund capital market model. As in previous literature, a mean-reverting market portfolio implies a “horizon effect” in typical investors’ allocations. For investors whose risk aversion is higher than the representative investor’s, the horizon effect becomes substantially larger in the capital market model than in previous models.
Keywords: dynamic asset allocation, mean reversion, horizon effect, momentum, representative investor, time diversification
JEL Classification: G11
Suggested Citation: Suggested Citation