Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market
A number of portfolio strategies followed by practitioners are dominated because they are incompletely diversified over time. The Payoff Distribution Pricing Model is used to compute the cost of following undiversified strategies. Simple numerical examples illustrate the technique, and computer-generated examples provide realistic estimates of the cost of some typical policies using reasonable parameter values. The cost can be substantial and should not be ignored by practitioners. A section on generalizations shows how to extend the analysis to term structure models and other general models of returns.
|Date of creation:||1987|
|Date of revision:||Jan 1988|
|Publication status:||Published in Review of Financial Studies (Spring 1988), 1(1): 67-88|
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|Order Information:|| Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA|
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