NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Dynamic Trading Strategies and Portfolio Choice

Ravi Bansal, Magnus Dahlquist, Campbell R. Harvey

NBER Working Paper No. 10820
Issued in October 2004
NBER Program(s):   AP

Traditional mean-variance efficient portfolios do not capture the potential wealth creation opportunities provided by predictability of asset returns. We propose a simple method for constructing optimally managed portfolios that exploits the possibility that asset returns are predictable. We implement these portfolios in both single and multi-period horizon settings. We compare alternative portfolio strategies which include both buy-and-hold and fixed weight portfolios. We find that managed portfolios can significantly improve the mean-variance trade-off, in particular, for investors with investment horizons of three to five years. Also, in contrast to popular advice, we show that the buy-and-hold strategy should be avoided.

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Document Object Identifier (DOI): 10.3386/w10820

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