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Optimal portfolio leverage

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  • Paul van Rensburg

    (Paul van Rensburg)

Abstract

The Optimal Portfolio Leverage Ratio provides the level of leverage to use to attain the highest expected long-term terminal value of an investment and is calculated independently of investors’ indifference curves. This article applies a discrete multi-period compounding framework to both discrete and continuous cross-sectional pay-off distributions. In both cases, an Optimal Portfolio Leverage Ratio is derived from first principles and in the case of the latter, a multi-asset solution is also presented. The primary implications for equilibrium asset pricing are considered and a multi-period analogue to the CAPM is derived. This version of the CAPM is to be tested as a joint hypothesis with a specified Optimal Growth Portfolio.

Suggested Citation

  • Paul van Rensburg, 2016. "Optimal portfolio leverage," Journal of Asset Management, Palgrave Macmillan, vol. 17(1), pages 22-33, January.
    • Handle: RePEc:pal:assmgt:v:17:y:2016:i:1:d:10.1057_jam.2015.36
    DOI: 10.1057/jam.2015.36
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    References listed on IDEAS

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    1. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    2. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 25(2), pages 65-86.
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