Investing for the Short and the Long Term
AbstractIf asset returns have different dynamics, then their short and long run risk characteristics differ. For instance, if returns on one asset follow a random walk, it is very risky to hold for the long term even if it is quite safe for the short term. This paper examines the effects of different returns dynamics of assets on optimal portfolio behavior, for Portfolios held for differing lengths of times. It then examines the evidence on the dynamics of stock and bill returns in the United States. The evidence is that bill returns are more highly serially correlated than stock returns. Thus their riskiness relative to that of stocks rises the longer they are held. optimal portfolios are simulated, and it is shown that optimal port- folio proportions are not very sensitive to the length of the holding period of the portfolio.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0922.
Date of creation: Jun 1982
Date of revision:
Publication status: published as Stanley Fischer. "Investing for the Short and the Long Term," in Zvi Bodie and John B. Shoven, editors, "Financial Aspects of the United States Pension System" University of Chicago Press (1983)
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-10 (All new papers)
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- Hakansson, Nils H, 1970. "Optimal Investment and Consumption Strategies Under Risk for a Class of Utility Functions," Econometrica, Econometric Society, vol. 38(5), pages 587-607, September.
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