Wealth and risk from leveraged stock portfolios

A modest amount of leverage enhances the performance of stock portfolios in the long run. However, higher amounts of leverage produce dramatic declines in long-run wealth. Using probability distributions constructed from value-weighted stock index returns and a borrowing rate two percentage points h...

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Veröffentlicht in:	Financial services review (Greenwich, Conn.) Conn.), 2002-03, Vol.11 (1), p.33
Hauptverfasser:	Domian, Dale L, Racine, Marie D
Format:	Artikel
Sprache:	eng
Schlagworte:	Analysis Asset allocation Asset-backed securities Bankruptcy Borrowing Expected utility Expected values Forecasts and trends Government bonds Investments Leverage Leverage (Finance) Margin requirements Probability Rates of return Risk assessment Risk premiums Simulation Standard deviation Stock Stock exchanges Studies Treasury bills Value analysis (Cost control) Wealth
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Zusammenfassung:	A modest amount of leverage enhances the performance of stock portfolios in the long run. However, higher amounts of leverage produce dramatic declines in long-run wealth. Using probability distributions constructed from value-weighted stock index returns and a borrowing rate two percentage points higher than Treasury bills, the maximum median ending wealth is achieved with an asset allocation of 170% stock. We use Value at Risk (VaR) to measure downside risk over a range of asset allocations and holding periods. [PUBLICATION ABSTRACT]
ISSN:	1057-0810 1873-5673