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Dollar-Cost and Value Averaging: Theory and Applications
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Dollar-cost and value averaging investing strategies are theoretically examined and applied for two asset classes: stocks and bonds. Theoretical expression of the cumulative distribution function, expectation and variance is developed for both strategies. Most of the obtained results are recursive, but some results for dollar-cost averaging are obtained in a closed form. In particular, closed form theoretical results are developed for dollar-cost averaging expectation, variance, Sharpe ratio and related optimization. Applications use annual data from the S&P Composite Index and 6-month bonds, providing results for expectation, variance, Sharpe ratio, related optimization and quantiles of returns. In applications, simulation is employed when theoretical results are unfeasible to compute. The results can be used by investors for selecting a desired risk-return balance. From a policy perspective, the results indicate that dollar-cost averaging is a viable investing strategy for large investment funds like university endowment funds.