In this paper we derive the exact solution of the multi-period portfolio
choice problem for an exponential utility function under return predictability.
It is assumed that the asset returns depend on predictable variables and that
the joint random process of the asset returns and the predictable variables
follow a vector autoregressive process. We prove that the optimal portfolio
weights depend on the covariance matrices of the next two periods and the
conditional mean vector of the next period. The case without predictable
variables and the case of independent asset returns are partial cases of our
solution. Furthermore, we provide an empirical study where the cumulative
empirical distribution function of the investor's wealth is calculated using
the exact solution. It is compared with the investment strategy obtained under
the additional assumption that the asset returns are independently distributed.Comment: 16 pages, 2 figure