Risk Aversion and the Investment Horizon: A New Perspective on the Time Diversification Debate

Abstract

Investment managers generally subscribe to the principle oftime diversification. This implies that a larger portion oftheporifolioshould be devoted to risky assets as the in­ vestment horizon increases. In contrast, academics have shown that for investors with utility functions characterized by constant relative risk aversion, the optimal asset-al­ locations trategy is indep endentofthe investment horizon. The relative risk avers ion in these studies is assumed to be constant both with respect to wealth as well as invest­ ment horizon. We s uggest a utility function that explicitly captures the notion that indi­ viduals are more risk tolerant when the investment horizon is long, thereby validating the intuitively appealing time divers ification argument.

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Cite this paper

@inproceedings{Jaggia2012RiskAA, title={Risk Aversion and the Investment Horizon: A New Perspective on the Time Diversification Debate}, author={Sanjiv Jaggia and Satish Thosar}, year={2012} }