2015•Review of Business ResearchRequires access

ASSET ALLOCATION ACROSS INVESTMENT HORIZONS WITH INDEPENDENT RETURNS

Ronald W. Best, Charles W. Hodges, James Yoder

Abstract

ABSTRACT We investigate the optimal portfolio mix of bonds and stocks across investment horizons. Sharpe ratios are computed using simulated returns for portfolios ranging from 100% bonds to 100% stocks where the portfolio mix is varied in increments of five percentage points. Holding periods from one to 25 years are examined. The optimal mix of bonds and stocks is identified as the portfolio with the highest Sharpe ratio for each holding period. The results show that when returns are independent over time, the weight of bonds increases as the investment horizon lengthens. Keywords Sharpe ratio, investment horizon, asset allocation

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Key concepts: Sharpe ratio, Bond, Portfolio, Asset allocation, Economics, Investment (military), Asset (computer security), Financial economics