American Journal of Industrial and Business Management

Volume 7, Issue 7 (July 2017)

ISSN Print: 2164-5167   ISSN Online: 2164-5175

Google-based Impact Factor: 0.92  Citations  

Modern Portfolio Theory, Digital Portfolio Theory and Intertemporal Portfolio Choice

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DOI: 10.4236/ajibm.2017.77059    2,185 Downloads   6,402 Views  Citations
Author(s)

ABSTRACT

The paper compares three portfolio optimization models. Modern portfolio theory (MPT) is a short-horizon volatility model. The relevant time horizon is the sampling interval. MPT is myopic and implies that investors are not concerned with long-term variance or mean-reversion. Intertemporal portfolio choice is a multiple period model that revises portfolios continuously in response to relevant signals to reduce variance of terminal wealth over the holding period. Digital portfolio theory (DPT) is a non-myopic, discrete time, long-horizon variance model that does not include volatility. DPT controls mean-reversion variances in single period solutions based on holding period and hedging and speculative demand.

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Jones, C.K. (2017) Modern Portfolio Theory, Digital Portfolio Theory and Intertemporal Portfolio Choice. American Journal of Industrial and Business Management, 7, 833-854. doi: 10.4236/ajibm.2017.77059.

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