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Rev Fin 1988; 1:67-88
© 1988 the Society for Financial Studies

Article

Inefficient dynamic portfolio strategies or how to throw away a million dollars in the stock market

PH Dybvig
Yale School of Management, Box 1A, New Haven, CT 06517, USA

Abstract

A number of portfolio strategies followed by practitioners are dominated because they are incompletely diversified over time. The payoff distribution pricing model is used to compute the cost of following undiversified strategies. Simple numerical examples illustrate the technique, and computer-generated examples provide realistic estimates of the cost of some typical policies, using reasonable parameter values. The cost can be substantial and should not be ignored by practitioners. A section on generalizations models and other general models of returns.


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