Asset Allocation Is Intertemporal Preference
Asset allocation is an exercise in subjective intertemporal preference. Saving and investing demand that we understand this preference, our liquidity needs, and the macroeconomic and institutional context we live in. But we have simply lost that understanding and instead follow regulations. Under the current paradigm, for instance, expected returns are considered the outcome of volatilities modelled after random processes. Nothing could be further from reality. In this chapter, we describe and suggest a method to establish our subjective liquidity and intertemporal preferences first.
KeywordsIntertemporal preference Interest rates Efficient frontier Optimal portfolio Liquidity preference Asset allocation Compounded rate of return Final value Capital Investing Trading Investing asset Derivatives Commodities Contango Backwardation
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