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Horizon Length and Portfolio Risk

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  • Christian Gollier
  • Richard J. Zeckhauser

Abstract

In this paper, we compare the attitude towards current risk of two expected-utility-maximizing investors that are identical except that the first investor will live longer than the" second one. In one of the models under consideration, there are two assets at every period. The" first asset has a zero sure return, whereas the second asset is risky without serial correlation of" yields. It is often suggested that the young investor should purchase more of the risky asset than" the old investor in such circumstances. We show that a necessary and sufficient condition to get" this property is that the Arrow-Pratt index of absolute tolerance (Tu) be convex. If we allow for a" positive risk-free rate, the necessary and sufficient condition is Tu convex extends the well-known result that investors are myopic in this model if and only if the utility" function exhibits constant relative risk aversion.

Suggested Citation

  • Christian Gollier & Richard J. Zeckhauser, 1997. "Horizon Length and Portfolio Risk," NBER Technical Working Papers 0216, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberte:0216
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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