back to basics: why does a longer time horizon imply a greater risk tolerance?

example, only, intended, because

I realize that w a longer time horizon, we have more time to recover from losses.

but. intuitively, just because I have a longer time to recover, doesn't mean i like it any better!

take for example an endowment that's intended to spend itself out of existence in 10 years or less.
intuitively, I'd say screw it, rite? I only got 10 years, let's rock and roll! let's live a little, get ourselves nice risky assets w. juicy returns. but noooo, apparently, short horizon, so must be risk averse.

does this time horizon business actually have anything to do w. volatility? given that volatility grows @ the rate of sqrt (time), this actually reduces volatility estimates w. longer time horizons.

so could one conclude that, ceteris paribus, longer time horizon == smoothed / lower volatility estimates ====> essentially higher Sharpe ratio, and therefore you're basically getting a better deal for your risk, and THAT is what actually makes you less risk averse?

. CFA Level 3 Ethics

. schweser Kaplan questions

. Does anyone else ever do this with quantitative questions?

. a question about this year's exam for the repeaters

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发表于 2011-7-11 19:51 | 只看该作者

memorize and move on. dont fight it.

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IAmNeil

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发表于 2011-7-11 19:51 | 只看该作者

I am not going to argue no reason to. You have a mistake though.

Edited 1 time(s). Last edit at Thursday, May 26, 2011 at 08:58PM by Paraguay.

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发表于 2011-7-11 19:51 | 只看该作者

longer time horizon means greater ability to live w/ the consequences of volatile stock returns. Think of a person nearing retirement in 2008 before the financial crisis hit. He's got a bunch of money saved up and as soon as he retires, he's going to buy an annuity to fund the rest of his retirement. If the market tanks and he loses 50% of his retirement in a few months, now he's got some problems.

If you're 30 years old and the market tanks, you're not as worried because you have a long time horizon to make that up. It hasn't really affected your future retirement if the market comes back eventually.

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