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The Role of Learning in Dynamic Portfolio Decisions”

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  • Brennan, Michael

Abstract

This paper analyzes the effect of uncertainty about the mean return on the risky asset on the portfolio decisions of an investor who has a long investment horizon. Building on the earlier work of Detemple (1986), Dothan and Feldman (1986), and Gennotte (1986), it is shown that the possibility of future learning about the mean return on the risky asset induces the investor to take a larger or smaller position in the risky asset than she would if there were no learning, the direction of the effect depending on whether the investor is more or less risk tolerant than the logarithmic investor whose portfolio decisions are unaffected by the possibility of future learning. Numerical calculations show that uncertainty about the mean return on the market portfolio has a significant effect on the portfolio decision of an investor with a 20 year horizon if her assessment of the market risk premium is based solely on the Ibbotson and Sinquefield (1995) data.

Suggested Citation

  • Brennan, Michael, 1997. "The Role of Learning in Dynamic Portfolio Decisions”," University of California at Los Angeles, Anderson Graduate School of Management qt8js8x85g, Anderson Graduate School of Management, UCLA.
    • Handle: RePEc:cdl:anderf:qt8js8x85g
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    References listed on IDEAS

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    8. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Maenhout, Pascal J., 2006. "Robust portfolio rules and detection-error probabilities for a mean-reverting risk premium," Journal of Economic Theory, Elsevier, vol. 128(1), pages 136-163, May.
    2. Tan Wang, 2000. "Updating Rules for Non-Bayesian Preferences," Econometric Society World Congress 2000 Contributed Papers 0157, Econometric Society.
    3. Honda, Toshiki, 2003. "Optimal portfolio choice for unobservable and regime-switching mean returns," Journal of Economic Dynamics and Control, Elsevier, vol. 28(1), pages 45-78, October.
    4. Herve Roche, 2004. "Optimum Consumption and Portfolio Allocations under Incomplete Information," Econometric Society 2004 Latin American Meetings 79, Econometric Society.

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