Working Paper: NBER ID: w28513
Authors: John H. Cochrane
Abstract: How should long-term investors form portfolios in our time-varying, multi-factor and friction-filled world? Two conceptual frameworks may help: First, look directly at the stream of payments that a portfolio and payout policy can produce. Second, include a general equilibrium view of the markets' economic purpose, and the nature of investors' different preferences, risk-taking ability, and function in that equilibrium. These perspectives can rationalize some of investors' behaviors, suggest substantial revisions to standard portfolio theory, and help us to apply portfolio theory in a way that is practically useful.
Keywords: long-term investing; portfolio management; asset management
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| long-term investment strategies (G11) | expected performance of portfolios (G11) |
| nature of investment payoffs (G11) | investor behavior (G41) |
| cash flows from investments (F21) | better portfolio management (G11) |
| steady stream of income (D33) | evaluation of portfolios (G11) |
| shift from short-term returns to long-term payoffs (G40) | improve investment outcomes (G11) |
| traditional metrics (alpha and beta) (C46) | suboptimal decision-making (D91) |
| indexed perpetuities (G12) | steady income stream (D33) |
| steady income stream (D33) | reduce perceived risk (D18) |