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Dynamic Asset Allocation for Stocks, Bonds, and Cash

Isabelle Bajeux‐Besnainou, James V. Jordan and Roland Portait
The Journal of Business
Vol. 76, No. 2 (April 2003), pp. 263-287
DOI: 10.1086/367750
Stable URL:
Page Count: 25
Subjects: Finance Business
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Dynamic Asset Allocation for Stocks, Bonds, and Cash
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Closed‐form solutions for HARA optimal portfolios are obtained in a dynamic portfolio optimization model in three assets (stocks, bonds, and cash) in a Vasicek‐type model of stochastic interest rates with correlated stock prices. The HARA is a buy‐and‐hold combination of a zero‐coupon bond with maturity matching the investor’s horizon and a “CRRA mutual fund.” This simple characterization facilitates insights about investor behavior over time and provides explanations on the rational use of convex versus concave investment strategies. The model illuminates clearly the role of the different market parameters and relative risk aversion in portfolio strategies.

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