Working Paper: NBER ID: w10820
Authors: Ravi Bansal; Magnus Dahlquist; Campbell R. Harvey
Abstract: 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.
Keywords: Dynamic Trading Strategies; Portfolio Choice; Mean-Variance Optimization
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| traditional buy-and-hold strategies (G40) | poor portfolio performance (G11) |
| ignoring conditioning information (D80) | suboptimal outcomes (I14) |
| incorporating conditioning information (Y80) | significant economic gains (F69) |
| dynamic trading strategies (C69) | improve risk-return trade-offs (G11) |
| flexibility of portfolio weights (G11) | improved risk-return trade-offs (G11) |