Chapter 11. Investment Strategy for the Long Term

WILLIAM F. SHARPE, PhD

STANCO 25 Professor of Finance, Emeritus at Stanford University's Graduate School of Business

Abstract: Almost by definition, an investment strategy is designed for medium- to long-term investment. It relies on estimates of expected returns, risks, and correlations projected to apply over substantial periods. While it is tempting to base such estimates on recent experience in capital markets, this is generally not a good choice. The ability to identify broad asset classes that will do especially well in the future would be extremely valuable. Information that would enable one to do so will be sought by many investors. As they try to act on such information, prices will adjust to restore equilibrium relationships.

Keywords: Efficient strategies, inefficient strategies, aggressive strategies, portfolio theory, capital market theory, efficient frontier, passive strategies, indexing strategies, active strategies, world market portfolio, representative investor, efficient market, capital asset pricing model (CAPM), diversification, beta risk

Investment is about risk and expected return. No one likes risk and the higher an investment's expected return, the better. Textbook descriptions of the investment process use these observations to divide investment strategies into two types. Inefficient strategies incur risk that is not rewarded sufficiently with higher expected return. Efficient strategies provide the highest ...

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