Title: A Paradox of the Mean Variance Setting for the Long Term Investor
Abstract: We show that the mean-variance preferences have counterfactual implications for a risk averse long term decision maker. In the simple case of dynamic portfolio choice, we show that the optimal certainty equivalent is decreasing with the investor’s horizon towards its lower bound, the riskless rate. For some horizons (less than 25 years in our simulations), the economic value of diversification is 0 and therefore the optimal portfolio strategy is a buy and hold one in the riskless asset. Therefore, under-diversification is optimal. These results question the usefulness of the mean variance setting for long term dynamic decision making.
Publication Year: 2013
Publication Date: 2013-09-17
Language: en
Type: book-chapter
Indexed In: ['crossref']
Access and Citation
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot