Optimal Portfolios For Different Holding Periods

Abstract

This study uses a block bootstrap method to construct random samples of returns of six major financial assets and identifies optimal portfolios for three different objectives relating to risk and return for short, medium, and long holding periods. Optimal portfolios minimizing risk consist solely of Treasury Bills and small company stocks for all periods, with an increasing allocation to small company stocks as the investment horizon lengthens. Optimal portfolios minimizing risk relative to return, as well as those maximizing the risk premium relative to risk, contain intermediate-term government bonds and stocks for all horizons, and the proportions of stocks in these portfolios increase with the investment horizon, small company stocks becoming the major component of the optimal portfolios for 10 years. These results indicate that, for investors optimizing any of these three objectives, the optimal portfolios contain increasing allocations of riskier assets, and decreasing allocations of safer assets, as the holding period increases.