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Financial Markets and Portfolio Management

, Volume 29, Issue 3, pp 251–269 | Cite as

Do not put all your eggs in one (time) basket

  • Zvika AfikEmail author
Article
  • 212 Downloads

Abstract

We show that it is easy to enhance an investment’s Sharpe ratio at no additional cost by purchasing the risky asset in a few installments instead of all at once. A similar argument holds for selling the risky asset. In the simple case of a geometrical Brownian motion (GBM), we prove analytically that such a strategy decreases the variance of returns without changing the expected returns, relative to the one-shot strategy. We demonstrate the benefits of this strategy by bootstrapping daily S&P-500 prices for the 1985–2013 period and using Monte Carlo simulations of GBM and jump-diffusion processes. The results are statistically significant. We show that the strategy is more effective for short investment horizons and that performance improves with the number of installments used.

Keywords

Investment Diversification Monte Carlo Sharpe ratio 

JEL Classifications

G11 C15 

Notes

Acknowledgments

I thank Simon Benninga, Koresh Galil, Gady Jacoby, and an anonymous reviewer for their helpful comments. The idea for this paper was triggered by a recommendation of Rafi Gamish (an investment fund manager and private investor) to execute an investment decision in a few installments aiming to “test the market” instead of a one-shot purchase of the entire amount. The responsibility for the paper is, of course, mine.

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Copyright information

© Swiss Society for Financial Market Research 2015

Authors and Affiliations

  1. 1.Department of Business Administration, Guilford Glazer Faculty of Business and ManagementBen-Gurion University of the NegevBeer ShevaIsrael

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