Journal of Financial Economics 1 (1974) 95.

Q North-Holland Publishing Company

COMIMENT ON MERTON ANm SAMUELSON

Nils H. HAKANSSON
Uniuersitv of Cali/ornia, Berkeley, Cali/. 94720, U.S.A.

Received October 1973

Professors Merton and Samuelson have provided us with a skillful and detailed
clarification of some of the important mathematical issues that arise in, and too
often in the past have obscured, multi-period portfolio choice situations.
Personally, I am further indebted to them for pointing out an erroneous argu-
ment in my paper (1971, p. 871). But while their goal of elucidation has been
admirably achieved on many points, this does not seem to be the case concerning
the average-compound-return model (for which they show a pointed lack of
adoration and) for which the reader may legitimately wonder about the role of
the faulty argument [Hakansson (1971, p. 87l)] described at the beginning of
their section 4. That argument, as hc may of course already have discovered,
can, like scaffolding, be removed from my paper without consoqucncc to the
central assertions made thcrc. Since the corrcctcd reasoning is available in
Hakansson and Miller (1973, sect. III), it need not bc rcproduccd hcrc.
At the end of section 4, Professors Mcrton and Samuclson write that thcrc is
no ‘. . . hope that the mean and variance of cxpcctcd-avcragc-compound-return
(sic) can scrvc as asymptotically suflicicnt decision paramctcrs’ [note: no
contrary assertion was made in my paper (1971)]. It is perhaps unfortunate that
this conclusion is based on a stationary two-asset countcrcxamplc involving
isoelastic utility, because in that cast the set of exactly eficirnt N-period
sequences is identical to that generated by the Met-ton-Samuclson eq. (50), all
y 5 I/N. At any rate, the fact that their eqs. (48) and (50), for y # 0, give
different solutions (the mainstay of the Merton-Samuelson countcrexamplc at
the end of section 4) was also posted in Hakansson (1971, bottom of p. 878) and
illustrated by a three-asset example (e.g., points W and 2 in figure 4).

References
Hakansson. N., 1971, Multi-period mean-variance analysis: Toward a general theory of port-
folio choice, Journal of Finance XXVI. 851-884.
Hakansson, N. and B. Miller, 1973. Compound-return mean-variance clficient portfolios
never risk ruin, Finance Working Paper no. 8 (Institute of Business and Economic Research,
University of California, Berkeley. Calif.) forthcoming in: Management Science: Theory.
Mcrton, R. and P. Samuclson, 1974. Fallacy of the log-normal approximation to optimal port-
folio decision-making over many periods, Journal of Financial Economics 1.