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Investing for the Short and the Long Term

  • Stanley Fischer
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    If asset returns have different dynamics, then their short and long run risk characteristics differ. For instance, if returns on one asset follow a random walk, it is very risky to hold for the long term even if it is quite safe for the short term. This paper examines the effects of different returns dynamics of assets on optimal portfolio behavior, for Portfolios held for differing lengths of times. It then examines the evidence on the dynamics of stock and bill returns in the United States. The evidence is that bill returns are more highly serially correlated than stock returns. Thus their riskiness relative to that of stocks rises the longer they are held. optimal portfolios are simulated, and it is shown that optimal port- folio proportions are not very sensitive to the length of the holding period of the portfolio.

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    File URL: http://www.nber.org/papers/w0922.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0922.

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    Date of creation: Jun 1982
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    Publication status: published as Fischer, Stanley. "Investing for the Short and the Long Term." Financial Aspects of the U.S. Pension System, edited by Zvi Bodie and John B. Shoven. Chicago: UCP, (1983), pp. 153-176.
    Handle: RePEc:nbr:nberwo:0922
    Note: PE
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. Goldman, M Barry, 1979. "Anti-Diversification or Optimal Programmes for Infrequently Revised Portfolios," Journal of Finance, American Finance Association, vol. 34(2), pages 505-16, May.
    2. Hakansson, Nils H, 1970. "Optimal Investment and Consumption Strategies Under Risk for a Class of Utility Functions," Econometrica, Econometric Society, vol. 38(5), pages 587-607, September.
    3. Merton, Robert C. & Samuelson, Paul A., 1974. "Fallacy of the log-normal approximation to optimal portfolio decision-making over many periods," Journal of Financial Economics, Elsevier, vol. 1(1), pages 67-94, May.
    4. Ross, Stephen A., 1974. "Portfolio turnpike theorems for constant policies," Journal of Financial Economics, Elsevier, vol. 1(2), pages 171-198, July.
    5. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    6. Garbade, Kenneth & Wachtel, Paul, 1978. "Time variation in the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 4(4), pages 755-765, November.
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