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Article

Diversification Across Time

Ian Ayres and Barry Nalebuff
The Journal of Portfolio Management Winter 2013, 39 (2) 73-86; DOI: https://doi.org/10.3905/jpm.2013.39.2.073
Ian Ayres
is a professor at Yale Law School in New Haven, CT. ian.ayres@yale.edu
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  • For correspondence: ian.ayres@yale.edu
Barry Nalebuff
is a professor at Yale School of Management in New Haven, CT. barry.nalebuff@yale.edu
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  • For correspondence: barry.nalebuff@yale.edu
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Abstract

Young people who buy stock on margin and reduce their equity exposure as they age can reduce lifetime portfolio risk. For example, an initially leveraged portfolio produces the same mean accumulation as a constant 74% stock allocation with a 21% smaller standard deviation. Since the means are equal, the reduced volatility doesn’t depend on the equity premium. A leveraged life-cycle strategy also lets investors come closer to their utility-maximizing equity allocation. Monte Carlo simulations show that the gains continue even with equity premiums well below historical levels.

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The Journal of Portfolio Management: 39 (2)
The Journal of Portfolio Management
Vol. 39, Issue 2
Winter 2013
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Diversification Across Time
Ian Ayres, Barry Nalebuff
The Journal of Portfolio Management Jan 2013, 39 (2) 73-86; DOI: 10.3905/jpm.2013.39.2.073

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Diversification Across Time
Ian Ayres, Barry Nalebuff
The Journal of Portfolio Management Jan 2013, 39 (2) 73-86; DOI: 10.3905/jpm.2013.39.2.073
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  • Article
    • Abstract
    • CONNECTION TO THE LITERATURE
    • THE LEVERAGED LIFECYCLE STRATEGY
    • DATA AND METHODOLOGY
    • RESULTS OF COHORT SIMULATION
    • ROBUSTNESS
    • CONCLUSIONS
    • ENDNOTES
    • REFERENCES
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