Horizon Effects that are Larger than You Think: Dynamic Allocation

Volume 15, Number 2, 2017
Thomas J. O’Brien

This paper illustrates optimal dynamic allocation in a traditional two-fund capital market model. As in previous literature, a mean-reverting market portfolio implies a “horizon effect” in typical investors’ allocations. For investors whose risk aversion is higher than the representative investor’s, the horizon effect becomes substantially larger in the capital market model than in previous models.