Scandinavian Working Papers in Economics

SIFR Research Report Series,
Institute for Financial Research

No 31: Dynamic Trading Strategies and Portfolio Choice

Ravi Bansal , Magnus Dahlquist and Campbell R. Harvey ()
Additional contact information
Ravi Bansal: Duke University, Postal: Durham, NC 27708, USA
Magnus Dahlquist: Swedish Institute for Financial Research, Postal: Swedish Institute for Financial Research, Saltmätargatan 19A, 4th fl., SE-113 59 Stockholm, Sweden
Campbell R. Harvey: Duke University, Postal: Durham, NC 27708, USA

Abstract: Traditional mean-variance efficient portfolios do not capture the potential wealth creation opportunities provided by predictability of asset returns. We propose a simple method for constructing optimally managed portfolios that exploits the possibility that asset returns are predictable. We implement these portfolios in both single and multi-period horizon settings. We compare alternative portfolio strategies which include both buy-and-hold and fixed weight portfolios. We find that managed portfolios can significantly improve the mean-variance trade-off, in particular, for investors with investment horizons of three to five years. Also, in contrast to popular advice, we show that the buy-and-hold strategy should be avoided.

Keywords: Dynamic strategies; mean-variance optimization; multiperiod choice; efficient frontier; buy-and-hold investment

JEL-codes: G11; G12

26 pages, October 15, 2004

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