Misconceptions about Optimal Equity Allocation and Investment Horizon

R. Douglas Van Eaton and James A. Conover

Financial Analysts Journal, 1998, vol. 54, issue 2, 52-59

Abstract: Our analysis and results offer some resolution to a debate that has continued for 30 years. We demonstrate that, in contrast to prior claims, no conflict exists between the implications of economic models of choice under uncertainty and a rational investor preference for larger equity allocations at longer investment horizons. Using examples of expected utility of wealth and mean–variance utility, we show that the effect of a longer horizon on risky-asset allocation is consistent with increasing or decreasing optimal equity allocations, even under the assumption of constant relative risk aversion.

Date: 1998
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DOI: 10.2469/faj.v54.n2.2165

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