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The investment horizon problem : a resolution

Aase, Knut K.
Working paper
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URI
http://hdl.handle.net/11250/163979
Date
2009-09
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  • Discussion papers (FOR) [509]
Abstract
In the canonical model of investments, the optimal fractions in

the risky assets do not depend on the time horizon. This is against

empirical evidence, and against the typical recommendations of portfolio

managers. We demonstrate that if the intertemporal coefficient

of relative risk aversion is allowed to depend on time, or the age of

the investor, the investment horizon problem can be resolved. Accordingly,

the only standard assumption in applied economics/finance

that we relax in order to obtain our conclusion, is the state and time

separability of the intertemporal felicity index in the investor’s utility

function. We include life and pension insurance, and we also demonstrate

that preferences aggregate.
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Series
Discussion paper
2009:7

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