Long Horizon Portfolio Optimization under Log-Normal Return Assumptions

8 Pages Posted: 6 Mar 2020

Date Written: February 5, 2020

Abstract

Linear variance and covariance estimates can be a poor proxy for investment risk under log normal return assumptions over longer horizons. When applied over long holding periods, popular portfolio construction methods relying on linear return and variances could lead to incorrect portfolio choices that unfairly penalize assets with higher variance.

Keywords: Portfolio Construction, Log-Normal Distribution, Optimization, Return, Risk

JEL Classification: G11, C6

Suggested Citation

Sun, Jeff, Long Horizon Portfolio Optimization under Log-Normal Return Assumptions (February 5, 2020). Available at SSRN: https://ssrn.com/abstract=3532488 or http://dx.doi.org/10.2139/ssrn.3532488

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