a multifactor world investor would allocate his capital different from a mean variance investor. Multifactor investor do not hold mean variance efficient portfolio. I suppose this is intuitively acceptable. investor horizon matters for these model. If returns are independent over time, stock bond allocation is independent over time. the ratio of mean to variance is the same at all horizon for mean variance efficient portfolio. But the conclusion is invalid if return is predictable. if positive serial correlation exist for the return, the variance of return will increase with horizon faster than does the mean return. Stocks are less preferred. negative serial correlation or mean reversion means the variance of long horizon return is lower than the variance of shorter period horizon. Stocks are more attractive in the long run. Theoretical model of optimizing utility of wealth decide optimum allocation of stocks and bonds. Several issues are demonstrated to show how these allocations are changed. for example, uncertainty about the parameters of the model could change the stock allocation substantially. researchers are not convinced the model isolution is fully developed for practicle application yet. I am sure I have not seen the best model. the advantage of these models is that optimum timing strategies could be theorized. I do not have the details and could not report them for your interest.
Posted on: Sun, 06 Oct 2013 11:53:07 +0000
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