We exhibit a positive process h which summarizes two pieces of economically meaningful information. As a function the states of the world, it can be used as a correction lens for myopic investors, and it reveals the gap between static and dynamic mean-variance investment strategies. A short sighted investor who corrects the probability distribution with the help of h acts optimally for long horizons.

We describe the dynamic mean-variance efficient frontier conditioned on the information available at a future date in the form of a two fund separation theorem. The dynamic Sharpe ratio measures the distance from of an investment strategy to the efficient frontier. We explain how optimal dynamic Sharpe ratios aggregate through time and we study the time consistency rules which efficient portfolios must follow. We investigate the effect of a change of investment horizon, in particular we show that myopia is optimal as soon as the process h is deterministic.

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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 729.

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Length: 74 pages
Date of creation: 01 Aug 2001
Date of revision:
Handle: RePEc:ebg:heccah:0729

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Related research

Keywords: self financing portfolio; efficient frontier; sharpe ratio; myopia;

Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
F30 - International Economics - - International Finance - - - General
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

This paper has been announced in the following NEP Reports:

• NEP-ALL-2002-12-02 (All new papers)
• NEP-CFN-2002-12-02 (Corporate Finance)
• NEP-FIN-2002-12-02 (Finance)
• NEP-RMG-2002-12-02 (Risk Management)

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