Abstract
We examine the problem of time diversification from the viewpoint of prospect theory investors. We use a block bootstrap approach to generate returns of US stocks and Treasury bills for time horizons ranging from 1 year to 20 years. On average, value functions computed using these bootstrapped returns are mainly positive and increase monotonically with the time horizon. The strategy that yields the highest average value function is the one that buys and holds an all-equity portfolio for 20 years. In contrast, mean-variance optimal portfolios are more conservative, with the optimal proportion of the portfolio invested in stocks declining with time horizon. Our results suggest that time diversification ought to be viewed more favourably by prospect theory investors than by mean-variance investors.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
