Vol. 19, No. 4, 2021
Yoram Kroll and Moshe Ben-Horin
This paper presents a portfolio performance measure that accounts for the investment horizon assuming both risk and loss aversion as suggested by Tversky and Kahneman’s CPT framework. The optimal portfolio risk premiums of such investors decrease with the length of the investment horizon and our simulations indicate that the decrease is drastic. The suggested measure is theoretically-based and provides a user-friendly metric for gauging the appropriate relationship between the horizon and the investor’s optimal portfolio composition. Applying the methodology will likely lessen myopic behavior of investors and induce an increase of their portfolio’s weight on equities for longer term investors.