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Intermediate Financial Theory, 3rd Edition by John B. Donaldson, Jean-Pierre Danthine

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Chapter 16

Portfolio Management in the Long Run

Our earlier discussion of optimal portfolio construction was cast in the setting of an investor with a one-period time horizon wishing to maximize his end-of-period wealth. In Chapter 16 we expand the discussion to a many period investment horizon where the period by period risk free rate may vary. The influence of uncertainty in the investor’s labor income for his optimal portfolio proportions is discussed, as well as the concept of strategic asset allocation.

Keywords

Canonical portfolio problem; CAPM; MPT; T-bill rate; myopic portfolio allocation; log-linearization; mean reversion in stock returns; Epstein-Zin preferences; strategic asset allocation; labor income; real estate

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