Volume: 5, Issue: 6(2002)
pp. 563-573 DOI: 10.1142/S0219024902001547
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Full Text (PDF, 220KB)
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| Title: |
FROM RAGS TO RICHES: ON CONSTANT PROPORTIONS INVESTMENT STRATEGIES
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| Author(s): |
IGOR V. EVSTIGNEEV
School of Economic Studies, University of Manchester,
Oxford Road, Manchester M13 9PL, UKKLAUS REINER SCHENK-HOPPÉ
Institute for Empirical Research in Economics,
University of Zurich, Blümlisalpstrasse 10, 8006 Zürich, Switzerland
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| History: |
Received 28 September 2001
Accepted 1 November 2001
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| Abstract: |
This paper studies the performance of self-financing constant
proportions trading strategies, i.e. dynamic asset allocation
strategies that keep a fixed constant proportion of wealth invested in
each asset in all periods in time. We prove that any self-financing
constant proportions strategy yields a strictly positive exponential
rate of growth of investor's wealth in a financial market in
which prices are described by stationary stochastic processes and the
price ratios are non-degenerate. This result might be regarded
as being counterintuitive because any such strategy yields no increase
of wealth under constant prices. We further show that the result also
holds under small transaction costs, which is important for the
viability of this approach, since constant proportions strategies
require frequent rebalancing of the portfolio. |
| Keywords: |
Constant proportions strategies; balanced investment strategies; unbounded growth; stationary markets
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