Abstract
This paper provides a solution to the multiperiod asset allocation problem of risk averse individuals
facing nancial frictions. We develop theory and empirical methods to obtain estimates of
the individual's optimal nancial leverage and portfolio asset allocation. These decision variables
are assumed to be parametric functions of macroeconomic and nancial variables with such speci-
fications tested using statistical methods. The empirical application to a tactical portfolio reveals
three main ndings: a) nancial frictions limit the reaction of investors to changes in the investment
opportunity set; b) individuals hold countercyclical leverage positions with the potential to reduce
the volatility of debt over time; c) optimal portfolio weights and nancial leverage are negatively
related to the degree of investor's risk aversion and positively related to the investment horizon.