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Dynamic Trading Strategies and Portfolio Choice

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Author Info
Ravi Bansal
Magnus Dahlquist
Campbell R. Harvey

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Abstract

Traditional mean-variance efficient portfolios do not capture the potential wealth creation opportunities provided by predictability of asset returns. We propose a simple method for constructing optimally managed portfolios that exploits the possibility that asset returns are predictable. We implement these portfolios in both single and multi-period horizon settings. We compare alternative portfolio strategies which include both buy-and-hold and fixed weight portfolios. We find that managed portfolios can significantly improve the mean-variance trade-off, in particular, for investors with investment horizons of three to five years. Also, in contrast to popular advice, we show that the buy-and-hold strategy should be avoided.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10820.

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Date of creation: Oct 2004
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Handle: RePEc:nbr:nberwo:10820

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  1. Hansen, Lars Peter & Richard, Scott F, 1987. "The Role of Conditioning Information in Deducing Testable," Econometrica, Econometric Society, vol. 55(3), pages 587-613, May. [Downloadable!] (restricted)
  2. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June. [Downloadable!] (restricted)
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  3. John Y. Campbell & Luis M. Viceira, 1999. "Consumption And Portfolio Decisions When Expected Returns Are Time Varying," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 433-495, May. [Downloadable!] (restricted)
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  4. Balduzzi, Pierluigi & Lynch, Anthony W., 1999. "Transaction costs and predictability: some utility cost calculations," Journal of Financial Economics, Elsevier, vol. 52(1), pages 47-78, April. [Downloadable!] (restricted)
  5. Keim, Donald B. & Stambaugh, Robert F., 1986. "Predicting returns in the stock and bond markets," Journal of Financial Economics, Elsevier, vol. 17(2), pages 357-390, December. [Downloadable!] (restricted)
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  6. Harvey, Campbell R., 1989. "Time-varying conditional covariances in tests of asset pricing models," Journal of Financial Economics, Elsevier, vol. 24(2), pages 289-317. [Downloadable!] (restricted)
  7. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October. [Downloadable!] (restricted)
  8. Wayne E. Ferson, 2001. "The Efficient Use of Conditioning Information in Portfolios," Journal of Finance, American Finance Association, vol. 56(3), pages 967-982, 06. [Downloadable!] (restricted)
  9. Geert Bekaert, 2004. "Conditioning Information and Variance Bounds on Pricing Kernels," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 17(2), pages 339-378. [Downloadable!] (restricted)
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  10. Michael W. Brandt & Pedro Santa-Clara, 2004. "Dynamic Portfolio Selection by Augmenting the Asset Space," NBER Working Papers 10372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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