Dynamic Asset Allocation and Downside-Risk Aversion
نویسندگان
چکیده
This paper considers dynamic asset allocation in a mean versus downside-risk framework. We derive closed-form solutions for the optimal portfolio weights when returns are lognormally distributed. Moreover, we study the impact of skewed and fat-tailed return distributions. We nd that the optimal fraction invested in stocks is V-shaped: at low and high levels of wealth the investor increases the stock weight. The optimal strategy also exhibits reverse time-e ects: the investor allocates more to stocks as the horizon approaches. Furthermore, the investment strategy becomes more risky for negatively skewed and fat-tailed return distributions.
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