From Rags to Riches: On Constant Proportions Investment Strategies

IEER Working Paper No. 89

16 Pages Posted: 17 Oct 2001

See all articles by Igor V. Evstigneev

Igor V. Evstigneev

University of Manchester - Economics, School of Social Sciences

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics; Norwegian School of Economics (NHH) - Department of Finance

Date Written: August 2001

Abstract

This paper studies the performance of self-financing constant proportions trading strategies, i.e. dynamic asset allocation strategies that keep a fixed constant proportion of wealth invested in each asset in all periods in time. We prove that any self-financing constant proportions strategy yields a strictly positive exponential rate of growth of investor's wealth in a financial market in which prices are described by stationary stochastic processes and the price ratios are non-degenerate. This result might be regarded as being counterintuitive because any such strategy yields no increase of wealth under constant prices. We further show that the result also holds under small transaction costs, which is important for the viability of this approach, since constant proportions strategies require frequent rebalancing of the portfolio.

Suggested Citation

Evstigneev, Igor V. and Schenk-Hoppé, Klaus Reiner, From Rags to Riches: On Constant Proportions Investment Strategies (August 2001). IEER Working Paper No. 89. Available at SSRN: https://ssrn.com/abstract=287572 or http://dx.doi.org/10.2139/ssrn.287572

Igor V. Evstigneev (Contact Author)

University of Manchester - Economics, School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom
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HOME PAGE: http://www.evstigneev.net

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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