Constant-mix Strategies

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• If
  • joint distribution of returns is IID, and
  • an investor maximizes the expected value of a CRRA utility function

• Then
  • the investor should hold the same proportional values of assets every period
  • a constant-mix strategy (CMS)

• Therefore
  • IID + CRRA ===> CMS

• Many financial planners advocate constant-mix strategies for their clients
  • thus they may implicitly assume CRRA preferences for every investor