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Market Timing and Risk Reduction

Published online by Cambridge University Press:  06 April 2009

Phillip E. Pfeifer
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Abstract

This paper addresses both how best to incorporate forecasts of future excess market returns into a market-timing strategy and what additional return to expect as a consequence. In contrast to the work of Jensen [8] and Grant ([4], [5], and [6]), the results specifically consider and measure the attractiveness to a risk-averse investor of the positively skewed distribution of portfolio returns expected from a market-timed portfolio. The usual mean and variance characterization of a risky portfolio is not sufficient in the case of a markettimed portfolio, and a simple utility model is employed to measure the incremental value of a market-timing strategy. The results are given as a function of the relative volatility of the market, the quality of available forecasts, and the risk attitude of the investor.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 20 , Issue 4 , December 1985 , pp. 451 - 459
Copyright
Copyright © School of Business Administration, University of Washington 1985

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