Hostname: page-component-cd9895bd7-gvvz8 Total loading time: 0 Render date: 2024-12-25T07:47:16.921Z Has data issue: false hasContentIssue false

Market Timing and Risk Reduction

Published online by Cambridge University Press:  06 April 2009

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
Copyright
Copyright © School of Business Administration, University of Washington 1985

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Alexander, Gorden J., and Stover, Roger D.. “Consistency of Mutual Fund Performance during Varying Market Conditions.” Journal of Economics and Business, Vol. 32 (Spring 1980), pp. 219225.Google Scholar
[2]Campanella, Frank. The Measurement of Portfolio Risk Exposure. Lexington, Mass.: D. C. Head and Co. (1972).Google Scholar
[3]Chang, Eric C., and Lewellen, Wilbur G.. “Market Timing and Mutual Fund Investment Performance.” Journal of Business, Vol. 57 (01 1984), pp. 5772.Google Scholar
[4]Grant, Dwight. “Portfolio Performance and the ‘Cost’ of Timing Decision.” Journal of Finance, Vol. 32 (06 1977), pp. 837846.Google Scholar
[5]Grant, Dwight. “Market Timing and Portfolio Management.” Journal of Finance, Vol. 33 (09 1978), pp. 11191131.Google Scholar
[6]Grant, Dwight. “Market Timing: Strategies to Consider.” Journal of Portfolio Management, Vol. 5 (Summer 1979), pp. 4146.CrossRefGoogle Scholar
[7]Henriksson, Roy D.Market Timing and Mutual Fund Performance: An Empirical Investigation.” Journal of Business, Vol. 57 (01 1984), pp. 7396.Google Scholar
[8]Jensen, Michael. “Optimal Utilization of Market Forecasts and the Evaluation of Investment Performance.” In Mathematical Methods in Investment and Finance, Szegol, G. P. and Sheil, K., eds. Amsterdam: North Holland (1972), pp. 310335.Google Scholar
[9]SirKendall, Maurice, and Stuart, Alan. The Advanced Theory of Statistics. Vol. 1. Fourth edition. New York: MacMillan (1977).Google Scholar
[10]Klemkosky, Robert C., and Maness, Terry S.. “The Predictability of Real Portfolio Risk Levels.” Journal of Finance, Vol. 33 (05 1978), pp. 631639.CrossRefGoogle Scholar
[11]Kon, Stanley J., and Jen, Frank C.. “Estimation of Time Varying Systematic Risk and Performance for Mutual Fund Portfolios: An Application of Switching Regression.” Journal of Finance, Vol. 33 (05 1978), pp. 457475.Google Scholar
[ 12]Kon, Stanley J., and Jen, Frank C.. “The Investment Performance of Mutual Funds: An Empirical Investigation of Timing, Selectivity, and Market Efficiency.” Journal of Business, Vol. 52 (04 1979), pp. 263289.CrossRefGoogle Scholar
[13]Merton, Robert C.On Market Timing and Investment Performance. 1. An Equilibrium Theory of Value for Market Forecasts.” Journal of Business, Vol. 54 (07 1981), pp. 363406.CrossRefGoogle Scholar
[14]Miller, Tom W., and Gressis, Nicholas. “Nonstationarity and Evaluation of Mutual Fund Performance.” Journal of Financial and Quantitative Analysis, Vol. 40 (09 1980), pp. 639654.CrossRefGoogle Scholar
[15]Sharpe, William F.Likely Gains from Market Timing.” Financial Analysts Journal, Vol. 31 (0304 1975), pp. 6069.CrossRefGoogle Scholar
[16]Treynor, Jack L., and Mazuy, Ken. “Can Mutual Funds Outguess the Market?Harvard Business Review, Vol. 44 (0708 1966), pp. 131136.Google Scholar