Optimal Holding Period for Assets That Must Be Liquidated

A Certainty Equivalent Wealth Approach

Abstract

Consumers ojien invest with a spec$c goal in mind and often know with some precision when the investment proceeds will be needed to achieve that goal. Because different investors have different attitudes toward risk and because different asset types exhibit difSerent risk characteristics, there is often confusion as to the appropriate investment asset for a particular investor with a known investment horizon. It is also frequently unclear as to whether investments should be switched to a less risky asset as time to liquidation becomes short. This paper addresses the issues of initial asset choice and the advisability of switching among assets when the investment goal date is known, employ- ing the methodology of certaimy equivalent wealth. In addition to suggesting optimal investment strategies for individuals based upon holding period and degree of risk aversion, it shows that switching investment assets produces suboptimal results.