Time Value of Money and Optimal Portfolio Diversification
14 Pages Posted: 9 Aug 2019
Date Written: August 6, 2019
Investing is putting money to work today in exchange for more money tomorrow, and the present value formula precisely defines this trade off. This formula also contains the primary economic factors that drive asset class returns and are fundamental to optimal portfolio diversification: expected growth, expected inflation, and a discount rate. This paper shows that there is far greater impact from diversifying to growth and inflation surprises than from holding a little bit of all global asset classes.
Keywords: risk factors, risk parity, optimal portfolio, diversification, growth, inflation, risk premium
JEL Classification: G11, G12
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