We present a simulation-based method for solving realistic portfolio choice problems that potentially involve non-standard preferences and a large number of assets with arbitrary return distribution. Specifically, the return distribution can be time-varying as a function of many observable or unobservable state variables and can even be path-dependent. Furthermore, the method is flexible enough to accommodate intermediate consumption, parameter and model uncertainty, and portfolio constraints. We first establish the properties of the method for the choice between a stock index and cash when the stock returns are either iid or predictable by the dividend yield. We then explore the optimal asset allocation across ten industry portfolios that exhibit momentum through its empirical pattern of own- and cross-serial correlations of returns.

Economic shocks affect corporate cash flows far more than they do aggregate consumption. We examine the asset-pricing implications of corporate sensitivity to shocks using a continuous-time representative agent framework in which earnings are a stochastic fraction of total consumption. We provide closed-form solutions for equity values when earnings and consumption follow exponential-affine jump-diffusion processes. Calibrating the model to historical data, we show that the extreme sensitivity of corporate cash flows to shocks dramatically increases the equity premium. The model implies realistic values for the equity premium given modest levels of risk aversion and generates levels of equity volatility consistent with those experienced by the stock