Target Return Strategy

Ying Xue, Zheng Wen and Xu Jiang

The Financial Review, 2025, vol. 60, issue 4, 1483-1503

Abstract: We study the target return strategy (TRS), which exits the market once the return reaches a preset target. We show that the holding‐period return (HPR) cannot mean‐variance dominate TRS, but TRS can mean‐variance dominate HPR. We theoretically analyze TRS and quantitatively illustrate that training targets by a mean‐variance utility optimization algorithm based on recent HPRs and peak returns can improve welfare. By exiting at targets, TRS preempts potential price reversals, manages investment risk, enhances risk‐return profiles, and encourages market participation. TRS justifies the use of price‐contingent orders, explains the disposition effect, and questions market efficiency.

Date: 2025
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