Efficient gradualism in intertemporal portfolios

This paper examines intertemporal portfolio plans under autocorrelation in asset returns, and considers whether these plans conform to the common advice that risky assets be bought gradually and then held in decreasing amounts as the investment horizon approaches. Given elliptical returns, optimal portfolio plans with precommitment must be mean-variance efficient. Then, for ARMA (1, 1) parameterizations with negative autocorrelation, the age effect (gradual diminishing of risky holdings as the horizon approaches) is confirmed, as is dollar-cost averaging (gradual entry into the risky asset) for sufficiently distant horizons. For a numerically analyzed alternative bivariate returns process, only the age effect is confirmed. (C) 2000 Elsevier Science B.V. All rights reserved.