Dynamic Trading Strategies and Portfolio Choice
27 Pages Posted: 24 Sep 2004
Date Written: September 23, 2004
Traditional mean-variance efficient portfolios do not capture the potential wealth creation opportunities provided by predictability of asset returns. We propose a simple method for constructing optimally managed portfolios that exploits the possibility that asset returns are predictable. We implement these portfolios in both single and multi-period horizon settings. We compare alternative portfolio strategies which include both buy-and-hold and fixed weight portfolios. We find that managed portfolios can significantly improve the mean-variance trade-off, in particular, for investors with investment horizons of three to five years. Also, in contrast to popular advice, we show that the buy-and-hold strategy should be avoided.
Keywords: Dynamic strategies, mean-variance optimization, multiperiod choice, efficient frontier, buy-and-hold investment
JEL Classification: G11, G12
Suggested Citation: Suggested Citation