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Multi-Period Portfolio Optimization: Translation of Autocorrelation Risk to Excess Variance

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  • Byung-Geun Choi
  • Napat Rujeerapaiboon
  • Ruiwei Jiang

Abstract

Growth-optimal portfolios are guaranteed to accumulate higher wealth than any other investment strategy in the long run. However, they tend to be risky in the short term. For serially uncorrelated markets, similar portfolios with more robust guarantees have been recently proposed. This paper extends these robust portfolios by accommodating non-zero autocorrelations that may reflect investors' beliefs about market movements. Moreover, we prove that the risk incurred by such autocorrelations can be absorbed by modifying the covariance matrix of asset returns.

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  • Byung-Geun Choi & Napat Rujeerapaiboon & Ruiwei Jiang, 2016. "Multi-Period Portfolio Optimization: Translation of Autocorrelation Risk to Excess Variance," Papers 1606.06578, arXiv.org, revised Sep 2016.
    • Handle: RePEc:arx:papers:1606.06578
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    2. Lo, Andrew W & MacKinlay, A Craig, 1990. "When Are Contrarian Profits Due to Stock Market Overreaction?," The Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 175-205.
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