Black & Scholes (1974) argue that dollar-cost averaging investment policy which purchases stocks at several times is superior to lump-sum investment policy which buys stocks all at once thanks to the effect of time diversification. However, which one is superior between dollar-cost averaging and lump-sum investment policy is up until now in sharp contrast without unified opinions.Following Rozeff (1994), this study, by adjusting downward the wealth invested in the risky asset under the lump-sum policy so as to make the lump-sum and dollar-cost averaging policies have the same risk (variance), reinvestigates whether dollar-cost averaging policy is superior to lump-sum policy. According to the theoretical analysis of this paper, lump-sum policy dominates stochastically dollar-cost averaging policy as long as the expected rate of return of stocks is positive. This theoretical prediction is confirmed by the numerical analysis based upon the statistics of monthly rate of return of KOSPI from January 1980 to December 2011. Also, the simulated investments and bootstrappingsimulation based upon the same data strongly support the theoretical conclusion that adjusted lump-sum is superior to dollar-cost averaging as an investment policy.
Black & Scholes (1974) argue that dollar-cost averaging investment policy which purchases stocks at several times is superior to lump-sum investment policy which buys stocks all at once thanks to the effect of time diversification. However, which one is superior between dollar-cost averaging and lump-sum investment policy is up until now in sharp contrast without unified opinions.Following Rozeff (1994), this study, by adjusting downward the wealth invested in the risky asset under the lump-sum policy so as to make the lump-sum and dollar-cost averaging policies have the same risk (variance), reinvestigates whether dollar-cost averaging policy is superior to lump-sum policy. According to the theoretical analysis of this paper, lump-sum policy dominates stochastically dollar-cost averaging policy as long as the expected rate of return of stocks is positive. This theoretical prediction is confirmed by the numerical analysis based upon the statistics of monthly rate of return of KOSPI from January 1980 to December 2011. Also, the simulated investments and bootstrapping simulation based upon the same data strongly support the theoretical conclusion that adjusted lump-sum is superior to dollar-cost averaging as an investment policy.
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