 Название: Stocks, Bonds, and the Investment Horizon: Decision-Making for the Long Run
Автор: Haim Levy
Издательство: World Scientific Publishing
Год: 2022
Страниц: 494
Язык: английский
Формат: pdf (true), epub
Размер: 42.6 MB
A century ago, life expectancy was roughly 40 years, hence saving for retirement was not an important economic issue. Nowadays, life expectancy exceeds 80 years in many countries, and one should expect to live and consume many years after retirement. Thus, optimizing investments and savings for retirement, with a long planned investment horizon, has become an issue of crucial importance. How should individuals invest for the long run? Does the optimal asset allocation between risky stocks and relatively safer bonds change with age? Is the idiom "stocks for the long run" backed by scientific evidence? This book provides a comprehensive in-depth review of these issues, bridging theory and practice of investments for various horizons.
This book is devoted to the effect of the investment horizon on the main issues in finance. This is done once by assuming i.i.d., and once by relying on actual historical data, which may be serially correlated. We do not always provide the ultimate correct answer to the various issues analyzed in this book, but rather pinpoint the possible changes of the results with changes in the assumed investment horizon. We believe that it is important that academics and investors are aware of the effect of the employed horizon on the obtained results. Particularly, investors should first determine the desired investment horizon, and only then select the portfolio which is optimal for their specific horizon. Thus, investors may hold different optimal portfolios even in the case that they have homogenous expectations.
It is important to emphasize that assuming a relatively long investment horizon does not mean that investors cannot revise their portfolio periodically. For example, suppose that an investor plans to invest for retirement, say for 30 years. Given the current estimated distribution of return (which may be objective or subjective) of various assets, say stocks and bonds, corresponding to a date 30 years in the future, a decision may be made to allocate 70% to stocks and 30% to bonds. After one year has elapsed, due to changes in the economy, this investor may revise the estimated distribution of the return (corresponding to a date 29 years ahead) and may change their portfolio to allocate say 50% to stocks and 50% to bonds. Thus, having a long-planned investment horizon does not imply that revisions are not allowed. Notwithstanding, faced with the same assets, and even with the same profitability and risk estimates, a 70-year-old investor with a relatively short investment horizon may have a completely different optimal investment than a 30-year-old investor who plans to invest for 40 years. Thus, the planned investment horizon plays a crucial role in selecting the optimal investment.
The importance of the assumed investment horizon for choosing the optimal investment (particularly of stocks and bonds) has increased rapidly in the last few decades due to two main factors: a continuous increase in life expectancy, and very low prevailing interest rates. Realizing the increase in life expectancy and the need for long-term investments, life cycle mutual funds have grown rapidly, suggesting different investment recipes to investors with different investment horizons.
Contents:
Preface
Introduction
Chapter 1. Asset Allocation and the Horizon: The Ongoing Disputes
Chapter 2. The Distribution of Returns and the Horizon
Chapter 3. Mean–Variance, Stochastic Dominance, and the Investment Horizon
Chapter 4. Performance Indices and the Investment Horizon
Chapter 5. Stocks Versus Bonds: Mean–Variance and Expected Utility Paradigms
Chapter 6. Risk and the Horizon: The Discounting Cash-Flows Approach with Rothschild and Stiglitz’s Definition of Risk
Chapter 7. Stock Risk: Do Historical Crashes Tell the Whole Story? The Black Swan Hypothesis
Chapter 8. Discrete and Continuous Returns and the Investment Horizon
Chapter 9. Almost Stochastic Dominance Rules and the Horizon
Chapter 10. Prospect Theory and the Horizon
Chapter 11. The Change in the Relative Attractiveness of Stocks and Bonds with the Horizon with a Riskless Asset
Name Index
Subject Index
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