This paper illustrates optimal dynamic allocation in a traditional two-fund capital market model. As in previous literature, a mean-reverting market portfolio implies a “horizon effect” in typical investors' allocations. For investors whose risk aversion is higher than the representative...

Given mean-reverting equity and interest rate uncertainty, this study shows a relatively low economic cost of using a simple allocation strategy, buy-and-hold or constant-mix, instead of optimal reallocation. Moreover, given the decision to use one of the simple allocation strategies, the study...

In a fundamental dynamic allocation model where the equity price process has both momentum and reversion, reflecting transient mispricing, scenarios are found where typical risk-averse investors prefer dollar cost averaging to plunging a lump sum into an optimal buy-and-hold allocation