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Optimal portfolio leverage

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  • Paul van Rensburg

    (Paul van Rensburg)

Abstract

The Optimal Portfolio Leverage Ratio provides the level of leverage to use to attain the highest expected long-term terminal value of an investment and is calculated independently of investors’ indifference curves. This article applies a discrete multi-period compounding framework to both discrete and continuous cross-sectional pay-off distributions. In both cases, an Optimal Portfolio Leverage Ratio is derived from first principles and in the case of the latter, a multi-asset solution is also presented. The primary implications for equilibrium asset pricing are considered and a multi-period analogue to the CAPM is derived. This version of the CAPM is to be tested as a joint hypothesis with a specified Optimal Growth Portfolio.

Suggested Citation

  • Paul van Rensburg, 2016. "Optimal portfolio leverage," Journal of Asset Management, Palgrave Macmillan, vol. 17(1), pages 22-33, January.
  • Handle: RePEc:pal:assmgt:v:17:y:2016:i:1:d:10.1057_jam.2015.36
    DOI: 10.1057/jam.2015.36
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    References listed on IDEAS

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    1. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," Review of Economic Studies, Oxford University Press, vol. 25(2), pages 65-86.
    2. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942, Decembrie.
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