erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Optimum Investment Horizon For Small Investors In ISE -A Simulation Exercise

Levent Akdeniz (Bilkent University)
Aslıhan Salih Altay (Bilkent University)
Ayşe Ece Ungan (Bilkent University)

Abstract

The objective of this study is to practically investigate the optimum investment horizon for small and uninformed investors with randomly selected stocks and diversified portfolios in ISE during 1990-1999. Fama (1976) has illustrated that the portfolios containing large number of assets have lower standard deviations than the portfolios containing less number of assets. Less informed small investors in emerging markets like ISE might use this finding to construct well diversified portfolios. However the practical question about the optimum investment horizon for the individual stocks and well-diversified portfolios has never been addressed for emerging markets.

A simple simulation is designed for randomly constructing portfolios composed of one, five and ten securities. None of the complicated trading strategies is employed and the study is intended as a practical guide for a naive investor. The results of the simulation gives us the means and variances of the returns of the portfolios for investment horizons ranging between a day and a year. Mean returns per unit of standard deviation, which are considered as risk adjusted returns, are used as a decision criteria for optimum investment horizon for each portfolio. Our findings indicate that the small investors earn higher risk adjusted returns as the investment horizon gets longer.

Economic Research Center
Middle East Technical University
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