Title

Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market

Document Type

Discussion Paper

Publication Date

3-1-1987

CFDP Number

826R

CFDP Revision Date

1988-01-01

CFDP Pages

41

Abstract

A number of portfolio strategies followed by practitioners are dominated because they are incompletely diversified over time. The Payoff Distribution Pricing Model is used to compute the cost of following undiversified strategies. Simple numerical examples illustrate the technique, and computer-generated examples provide realistic estimates of the cost of some typical policies using reasonable parameter values. The cost can be substantial and should not be ignored by practitioners. A section on generalizations shows how to extend the analysis to term structure models and other general models of returns.

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