SHORT-HORIZON INPUTS AND LONG-HORIZON PORTFOLIO CHOICE

Efficient frontiers based upon long-horizon inputs differ from those b ased upon short-horizon inputs. Inputs to mean-variance optimization c hange significantly as investor horizons change because of autocorrela tion between certain asset classes and the use of short-horizon inputs to estimate long-term correlations. The authors employ simulation tec hniques to estimate long-horizon inputs to the mean-variance model and to construct efficient frontiers. These portfolios are then compared to efficient portfolios generated with short-horizon input. The author s find that some significant differences occur, especially with respec t to the minimum-variance portfolio.