Lifetime Portfolio Selection and Information

Jerome De Temple

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: The classical, finite horizon, consumption portfolio choice problem is reexamined, when the current return depends on the history of past observations. Optimal policies are characterized for the class of uncertainty/information structures, which result in an underlying Gaussian conditional distribution at any trading date. Decisions will be time dependent functions of wealth and of the mean and variance of the risky return.

For Bernoulli tastes, consumption is proportional to wealth but insensitive to information, whereas, in the isoelastic case, the proportionality coefficient is affected by new observations. The portfolio decision in both instances depends exclusively on information. For the logarithmic utility in addition, the optimal decision is myopic.

More informative structures in this latter case imply, under additional assumptions, a higher investment in the risky asset, for histories of observations resulting in a specified conditional mean. An increase in the latest observation has the same effect if it indicates a favorable shift in the mean risk faced. Finally, the dollar amount invested in the financial market remains unchanged in both instances.

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