TITLE:
Modern Portfolio Theory, Digital Portfolio Theory and Intertemporal Portfolio Choice
AUTHORS:
C. Kenneth Jones
KEYWORDS:
Portfolio Theory, Portfolio Optimization, Mean-Reversion Risk, Long-Horizon Risk, Portfolio Diversification
JOURNAL NAME:
American Journal of Industrial and Business Management,
Vol.7 No.7,
July
6,
2017
ABSTRACT: The paper compares three portfolio optimization
models. Modern portfolio theory (MPT) is a short-horizon volatility model. The
relevant time horizon is the sampling interval. MPT is myopic and implies that
investors are not concerned with long-term variance or mean-reversion.
Intertemporal portfolio choice is a multiple period model that revises
portfolios continuously in response to relevant signals to reduce variance of
terminal wealth over the holding period. Digital portfolio theory (DPT) is a
non-myopic, discrete time, long-horizon variance model that does not include
volatility. DPT controls mean-reversion variances in single period solutions
based on holding period and hedging and speculative demand.