Optimal Portfolio Rules for an Integrated Stock Bond Portfolio

Francesco Menoncin ()

No 2001014, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: In this paper we critique the famous separation theorem (or mutual fund theorem). We show that, if a portfolio contains stocks and bonds, then bonds generate a dependence of optimal portfolio composition on the investors’ temporal horizon. This dependence makes the theorem inapplicable if all investors have different time horizons. Thus, we state a new theorem explaining the behaviour of financial advisors recommending higher percentage of bonds for more risk averse investors. This new theorem considers the separation theorem as a special case. Finally, we propose a solution to the so called "equity premium puzzle”.

Keywords: separation theorem; asset allocation; equity premium puzzle (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 30
Date: 2001-06-01
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2001014

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