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Abstract
When the planning horizon is long, and the safe asset grows indefinitely, isoelastic
portfolios are nearly optimal for investors who are close to isoelastic for high wealth,
and not too risk averse for low wealth. We prove this result in a general arbitrage-free,
frictionless, semimartingale model. As a consequence, optimal portfolios are robust
to the perturbations in preferences induced by common option compensation schemes,
and such incentives are weaker when their horizon is longer. Robust option incentives
are possible, but require several, arbitrarily large exercise prices, and are not
always convex.