Diversification has been long considered an essential part of investing for the long term. Our paper aims to look further on portfolio diversification and how asset allocation can be optimized. We suggest that the selection of investments in a portfolio should be based on how the market behaves...

We study the impact of parameter uncertainty on the expected utility of a multiperiod investor subject to quadratic transaction costs. We characterize the utility loss associated with ignoring parameter uncertainty, and show that it is equal to the product between the single-period utility loss...

We implement a long-horizon static and dynamic portfolio allocation involving a risk-free and a risky asset. This model is calibrated at a quarterly frequency for ten European countries. We also use maximum-likelihood estimates and Bayesian estimates to account for parameter uncertainty. We find...

Following Levy and Roll [2010], we posit that the market portfolio is the efficient tangent Markowitz portfolio, i.e., it is mean-variance efficient. We then reverse engineer the expected returns and variance terms with constraints imposed by empirical data on a hierarchy of asset baskets. This...

An equivalent sigma-martingale measure (EsigmaMM) for a given stochastic process S is a probability measure R equivalent to the original measure P such that S is an R-sigma-martingale. Existence of an EsigmaMM is equivalent to a classical absence-of-arbitrage property of S, and is invariant if...