Optimal Value and Growth Tilts in Long-Horizon Portfolios

61 Pages Posted: 12 Sep 2005  

Jakub W. Jurek

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Luis M. Viceira

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 31, 2006

Abstract

We develop an analytical solution to the dynamic portfolio choice problem of an investor with power utility defined over wealth at a finite horizon, who faces a time-varying investment opportunity set, parameterized using a flexible vector autoregression. We apply this framework to study the horizon effects in the allocations of equity-only investors, who hold a mix of value and growth indices, and a more general investor, who also has access to Treasury bills and bonds. We find that the mean-allocation of equity-only investors is heavily tilted towards value stocks at short horizons, but the magnitude of this tilt declines dramatically with the investment horizon, implying that growth is less risky than value at long horizons. Investors with access to bills and bonds exhibit similar behavior, when value and growth tilts are computed relative to the total equity allocation of the portfolio. However, after accounting for the propensity of these investors to increase their total equity allocation as the horizon increases, the mean value tilt of the optimal allocation is shown to be positive and stable across time.

Keywords: portfolio choice, value premium

JEL Classification: G11, G12

Suggested Citation

Jurek, Jakub W. and Viceira, Luis M., Optimal Value and Growth Tilts in Long-Horizon Portfolios (October 31, 2006). HBS Finance Working Paper No. 06-012; EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=796207 or http://dx.doi.org/10.2139/ssrn.796207

Jakub W. Jurek

University of Pennsylvania - Finance Department ( email )

The Wharton School
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215-898-1588 (Phone)

National Bureau of Economic Research (NBER)

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Luis M. Viceira (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6331 (Phone)
617-496-6592 (Fax)

HOME PAGE: http://www.people.hbs.edu/lviceira

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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