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The Role of the Investment Horizon in Optimal Portfolio Sequencing (An Intuitive Demonstration in Discrete Time)
Author(s) -
Marshall John F.
Publication year - 1994
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1994.tb00410.x
Subject(s) - portfolio , economics , investment (military) , asset (computer security) , horizon , time horizon , discrete time and continuous time , asset allocation , investment strategy , investment decisions , financial economics , microeconomics , econometrics , actuarial science , finance , behavioral economics , computer science , mathematics , statistics , profit (economics) , geometry , computer security , politics , political science , law
This paper examines the role played by the investor's investment horizon in the choice of optimal portfolios. A complete discrete‐time, multiperiod, portfolio model is presented with a choice criterion that is consistent with the traditional utility approach but which is more amenable to a multiperiod environment. It is shown that investors should choose progressively less risky single‐period portfolios as their investment horizons grow shorter, even if they do not become more risk averse. This result holds both in the presence and in the absence of a riskless asset. The results are consistent with empirical evidence and the financial planning practice of moving investors into progressively less risky portfolios as they grow older.