A PRACTICAL FRAMEWORK FOR PORTFOLIO CHOICE

Richard O. Michaud

Traditional portfolio optimality criteria often have serious theoretical or practical limitations. A financial planning portfolio choice framework consisting of a resampled efficient portfolio set and multiperiod geometric mean analysis is a practical alternative for many situations of investment interest. While Monte Carlo financial planning is a more flexible framework, geometric mean analysis may be less error prone, theoretically justifiable, and convenient. Controversies that have limited applications of geometric mean analysis are resolvable by improved understanding of distributional properties and rational decision making issues. The geometric mean is also useful in rationalizing a number of investment paradoxes.