A UTILITY APPROACH TO THE PORTFOLIO ALLOCATION DECISION AND THE INVESTMENT HORIZON

Does the risk of a stock portfolio increase or decrease as the investm ent horizon lengthens? Does the portfolio mix depend on the horizon! T he author shows that portfolio selection can depend on the investment horizon. The investor's risk preferences (the utility function) are re levant. It is possible for stocks to be risky in each time period and to reduce risk (at least by some definitions) by increasing the length of the investment horizon. It is possible for stocks to be rejected i f they are to be held for one time period, but to be accepted if they are to be held for more than one time period. To achieve this result, it is necessary to move beyond use of the logarithmic utility function and to recognize that different investors have different risk prefere nces.