Vol. 18, No. 4, 2020
Kenneth Blay, Anish Ghosh, Steven Kusiak, Harry Markowitz, Nicholas Savoulides and Qi Zheng
The topic of optimal portfolio selection over time has garnered signiﬁcant attention from investment researchers since the introduction of portfolio theory in 1952. While computational, theoretical, and numerical methods have advanced, solutions introduced to date have yet to effectively address many practical aspects of the multi-period portfolio selection problem.
In this paper, we propose three key requisites for practical multi-period portfolio selection solutions that highlight the central challenges of managing portfolios across a multi- period investment horizon: effective duration management, incorporating real-world asset dynamics, and considering investment frictions and illiquidities. Based on these criteria, we detail an analytical framework for multi-period portfolio selection that provides intuition and yields guiding principles that describe how allocations and duration should evolve across a multi-period investment horizon, given speciﬁc investor objectives. We then introduce a practical simulation-based portfolio selection (SBPS) framework and present solutions for common investor objectives that are not only aligned with intuitive principles but also demonstrate the ﬂexibility afforded by SBPS in allowing us to address the three stated requisites for practical multi-period solutions.