Abstract

Investment managers generally subscribe to the principle of time diversification. This implies that a larger portion of the portfolio should be devoted to risky assets as the investment horizon increases. In contrast, academics have shown that for investors with utility functions characterized by constant relative risk aversion, the optimal asset-allocation strategy is independent of the investment horizon. The relative risk avers ion in these studies is assumed to be constant both with respect to wealth as well as investment horizon. We suggest a utility function that explicitly captures the notion that individuals are more risk tolerant when the investment horizon is long, thereby validating the intuitively appealing time diversification argument.

Disciplines

Economics

Publisher statement

This is an electronic version of an article published in The Journal of Psychology and Financial Markets.

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Economics Commons

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URL: http://digitalcommons.calpoly.edu/econ_fac/150