Dynamic portfolio selection by augmenting the asset space

Dynamic portfolio selection by augmenting the asset space

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Article ID: iaor20071325
Country: United Kingdom
Volume: 61
Issue: 5
Start Page Number: 2187
End Page Number: 2217
Publication Date: Oct 2006
Journal: Journal of Finance
Authors: ,
Keywords: investment
Abstract:

We present a novel approach to dynamic portfolio selection that is as easy to implement as the static Markowitz paradigm. We expand the set of assets to include mechanically managed portfolios and optimize statically in this extended asset space. We consider ‘conditional’ portfolios, which invest in each asset an amount proportional to conditioning variables, and ‘timing’ portfolios, which invest in each asset for a single period and in the risk-free asset for all other periods. The static choice of these managed portfolios represents a dynamic strategy that closely approximates the optimal dynamic strategy for horizons up to 5 years.

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