The main problem of portfolio optimization is parameter estimation error. Various methods have been suggested to mitigate this problem, among which are shrinkage, resampling, Bayesian updating, naïve diversification, and imposing constraints on the portfolio weights. This study suggests two...

The average after-tax real interest rate on U.S. T-bills and the average rate of return on long-term government bonds (LTGB) have been negative over the last 75 years. Is this negative rate an equilibrium phenomenon or simply an empirical fluke? We show that a negative equilibrium interest rate...

Prospect Theory (PT) and Constant Relative Risk Aversion (CRRA) have clear-cut implications for the optimal asset allocation between stocks and the risk-free asset as a function of the investment horizon. While CRRA preferences imply that the allocation should be independent of the horizon, we...