Serial Correlation of Asset Returns and Optimal Portfolios for the Long and Short Term

38 Pages Posted: 29 Jun 2004 Last revised: 11 Oct 2008

See all articles by Stanley Fischer

Stanley Fischer

Bank of Israel; National Bureau of Economic Research (NBER); International Monetary Fund (IMF)

George Pennacchi

University of Illinois

Date Written: June 1985


Optimal portfolios differ according to the length of time they are held without being rebalanced. For the case in which asset returns are identically and independently distributed, it has been shown that optimal portfolios become less diversified as the holding period lengthens.We show that the anti-diversification result does not obtain when asset returns are serially correlated, and examine properties of asymptotic portfolios for the case where the short term interest rate, although known at each moment of time, may change unpredictably over time. The theoretical results provide no presumption about the effects of the length of the holding period on the optimal portfolio. Using estimated processes for stock and bill returns, we show that calculated optimal portfolios are virtually invariant to the length of the holding period. The estimated processes for asset returns also imply very little difference between portfolios calculated ignoring changes in the investment opportunity set and those obtained when the investment opportunity set changes over time.

Suggested Citation

Fischer, Stanley and Pennacchi, George G., Serial Correlation of Asset Returns and Optimal Portfolios for the Long and Short Term (June 1985). NBER Working Paper No. w1625, Available at SSRN:

Stanley Fischer (Contact Author)

Bank of Israel ( email )

P.O. Box 780
Jerusalem, 91907

National Bureau of Economic Research (NBER)

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International Monetary Fund (IMF) ( email )

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George G. Pennacchi

University of Illinois ( email )

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