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Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market

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Author Info
Philip H. Dybvig (Cowles Foundation, Yale University)

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Abstract

A number of portfolio strategies followed by practitioners are dominated because they are incompletely diversified over time. The Payoff Distribution Pricing Model is used to compute the cost of following undiversified strategies. Simple numerical examples illustrate the technique, and computer-generated examples provide realistic estimates of the cost of some typical policies using reasonable parameter values. The cost can be substantial and should not be ignored by practitioners. A section on generalizations shows how to extend the analysis to term structure models and other general models of returns.

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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 826R.

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Length: 39 pages
Date of creation: 1987
Date of revision: Jan 1988
Publication status: Published in Review of Financial Studies, 1(1), 1988
Handle: RePEc:cwl:cwldpp:826r

Note: CFP 704.
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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
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Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  1. Elyès Jouini & Clotilde Napp, 2004. "Conditional comonotonicity," Decisions in Economics and Finance, Springer, vol. 27(2), pages 153-166, December. [Downloadable!] (restricted)
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  2. Elyès Jouini, 2003. "Market imperfections , equilibrium and arbitrage," Post-Print halshs-00167131_v1, HAL. [Downloadable!]
  3. Lawrence R. Glosten & Ravi Jagannathan, 1993. "A contingent claim approach to performance evaluation," Staff Report 159, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  4. Lucas, Andr‚ & Dert, Cees L., 1998. "On the inefficiency of portfolio insurance and caveats to the mean/downside-risk framework," Serie Research Memoranda 0057, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics. [Downloadable!]
  5. Carol L. Osler, 2001. "Currency orders and exchange-rate dynamics: explaining the success of technical analysis," Staff Reports 125, Federal Reserve Bank of New York. [Downloadable!]
  6. Borglin, Anders & Flåm, Sjur, 2007. "Rationalizing Constrained Contingent Claims," Working Papers 2007:12, Lund University, Department of Economics. [Downloadable!]
  7. Philip H. Dybvig & Jaime F. Zender, 1988. "Capital Structure and dividend Irrelevance with Asymmetric Information," Cowles Foundation Discussion Papers 878, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  8. GOLLIER, Christian, 2007. "Optimal expectations with complete markets," IDEI Working Papers 463, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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