Leveraged stock portfolios over long holding periods: A continuous-time model |
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| Authors: | Dale L Domian Marie D Racine Craig A Wilson |
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| Institution: | (1) School of Administrative Studies, Atkinson Faculty of Liberal and Professional Studies, York University, M3J 1P3 Toronto, ON, Canada;(2) Department of Finance and Management Science, College of Commerce, University of Saskatchewan, S7N 5A7 Saskatoon, SK, Canada |
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| Abstract: | We use a continuous-time model to derive return and wealth distributions for leveraged portfolios over long holding periods.
These theoretical distributions closely match empirical distributions obtained from a resampling procedure. The expected annualized
return is a concave function of the degree of leverage. With historical parameter values, the function is maximized at 203%
stock, borrowing an amount equal to 103% of net wealth. This maximal stock proportion is considerably reduced if the borrowing
rate is higher than the historical lending rate. |
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