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Do investors like to diversify? A study of Markowitz preferences

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  • Egozcue, Martín
  • García, Luis Fuentes
  • Wong, Wing-Keung
  • Zitikis, Ricardas

Abstract

We study rankings of completely and partially diversified portfolios and also of specialized assets when investors follow so-called Markowitz preferences. It turns out that diversification strategies for Markowitz investors are more complex than in the case of risk-averse and risk-inclined investors, whose investment strategies have been extensively investigated in the literature. In particular, we observe that for Markowitz investors, preferences toward risk vary depending on their sensitivities toward gains and losses. For example, it turns out that, unlike in the case of risk-averse and risk-inclined investors, Markowitz investors might prefer investing their entire wealth in just one asset. This finding helps us to better understand some financial anomalies and puzzles, such as the well known diversification puzzle, which notes that some investors tend to concentrate on investing in only a few assets instead of choosing the seemingly more attractive complete diversification.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 215 (2011)
Issue (Month): 1 (November)
Pages: 188-193

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Handle: RePEc:eee:ejores:v:215:y:2011:i:1:p:188-193

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Web page: http://www.elsevier.com/locate/eor

Related research

Keywords: Portfolio selection Diversified portfolio Markowitz preferences Utility theory Risk aversion;

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Cited by:
  1. Lean, H.H. & McAleer, M.J. & Wong, W-K., 2013. "Risk-averse and Risk-seeking Investor Preferences for Oil Spot and Futures," Econometric Institute Research Papers EI 2013-27, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  2. Zhidong Bai & Hua Li & Michael McAleer & Wing-Keung Wong, 2012. "Stochastic Dominance Statistics for Risk Averters and Risk Seekers: An Analysis of Stock Preferences for USA and China," Documentos de Trabajo del ICAE 2012-13, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  3. Martín Egozcue & Sébastien Massoni & Wing-Keung Wong & Ri?ardas Zitikis, 2012. "Integration-segregation decisions under general value functions:"Create your own bundle — choose 1, 2, or all 3!"," Documents de travail du Centre d'Economie de la Sorbonne 12057, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  4. repec:hal:journl:halshs-00747008 is not listed on IDEAS
  5. Bai, Zhidong & Phoon, Kok Fai & Wang, Keyan & Wong, Wing-Keung, 2013. "The performance of commodity trading advisors: A mean-variance-ratio test approach," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 188-201.
  6. Leung, Pui-Lam & Ng, Hon-Yip & Wong, Wing-Keung, 2012. "An improved estimation to make Markowitz’s portfolio optimization theory users friendly and estimation accurate with application on the US stock market investment," European Journal of Operational Research, Elsevier, vol. 222(1), pages 85-95.
  7. Broll, Udo & Wong, Wing-Keung & Wu, Mojia, 2013. "Banking Firm and Two-Moment Decision Making," MPRA Paper 51687, University Library of Munich, Germany.
  8. Eric S. Fung & Kin Lam & Tak-Kuen Siu & Wing-Keung Wong, 2011. "A Pseudo-Bayesian Model for Stock Returns In Financial Crises," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 4(1), pages 43-73, December.
  9. Guo, Xu & Lam, Kin & Wong, Wing-Keung & Zhu, Lixing, 2012. "A New Pseudo-Bayesian Model of Investors' Behavior in Financial Crises," MPRA Paper 42535, University Library of Munich, Germany.
  10. Martín Jorge Egozcue, 2012. "Gains from diversification: a regret theory approach," Economics Bulletin, AccessEcon, vol. 32(1), pages 204-219.
  11. Bai, Zhidong & Li, Hua & Wong, Wing-Keung, 2013. "The best estimation for high-dimensional Markowitz mean-variance optimization," MPRA Paper 43862, University Library of Munich, Germany.
  12. Chia-Lin Chang & Juan-Ángel Jiménez-Martín & Esfandiar Maasoumi & Teodosio Pérez Amaral, 2014. "A Stochastic Dominance Approach to Financial Risk Management Strategies," Documentos de Trabajo del ICAE 2014-08, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico, revised Apr 2014.

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