Essays on optimal portfolio decisions for long-term investors.
详细信息
文摘
This dissertation contains two essays on the optimal portfolio decision for long-term investors. The first essay studies the optimal asset allocation for long-horizon investors with non-tradable labor income when multiple risky asset returns are predictable. It finds that more risk-averse investors hold a higher bond/stock ratio in their risky portfolios when labor income is positively correlated with stock return or independent of risky asset returns, but the reverse is true when labor income is positively correlated with bond return. The allocation to stock inherits the inverted U-shaped pattern of labor income growth with respect to expected time until retirement. These results suggest that popular recommendations of investment advisors that more conservative investors should hold a higher bond/stock ratio and that the portfolio allocation to stock should equal 100 minus age may both lack theoretical justification. In the out-of-sample performance test, the dynamic portfolio shows the highest mean returns and Sharpe ratio than two benchmark portfolios, justifying the economic significance of incorporating the time-variation of investment opportunities and nontradable labor income into investors portfolio choice. The second essay studies employees optimal portfolio in their defined contribution pension plans. Assuming a discrete time model with predictable risky asset returns, the essay finds that the employees optimal portfolio decision can be greatly affected by the employees time to retirement, risk preference, contribution rate as well as the correlation between labor income and asset returns. Performance test shows that the gains from adopting the dynamic portfolio strategy relative to several benchmark strategies, including the 1/n rule, the optimal static strategy with and without the consideration of asset return predictability, all stock strategy, and all company stock strategy, are economically significant and the economic gain increases with employees risk aversion. The empirical evidence that employees invest significantly in their company stock in pension plans is difficult to be justified, even after the consideration of short-sale constraints, higher expected company stock return, employees familiarity with their company, and employers exclusive match policy. Over allocation to company stock can be very costly, especially to conservative employees.