Advanced Search
MyIDEAS: Login to save this article or follow this journal

Optimal diversification and risk-taking: a theoretical and empirical analysis

Contents:

Author Info

  • James A. Yunker
  • Alice Melkumian
Registered author(s):

    Abstract

    Among the justifications for capital property income received by private households is that it is a ‘return to risk-taking’. However, portfolio diversification provides an obvious means toward the reduction of risk. Moreover, it is widely believed that the wealthier the household, the more diversification it practices: the larger tends to be the proportion of its total portfolio allocated to publicly traded stock, and the larger tends to be the number of individual stock issues included in its portfolio. Using a simple ‘homogeneous securities’ model, explicit functional forms are obtained for both the optimal proportion of the portfolio allocated to stocks, and the optimal number of individual stock issues in the portfolio. Empirical evaluation of these theoretical results, using a dataset derived from the 2004 Survey of Consumer Finances (SCF), lends substantial support to the model. Applying these empirical results, it is found that as household capital wealth increases, expected capital income increases while simultaneously a reasonable risk indicator (the probability of incurring a negative return on the capital portfolio) decreases owing to the higher level of portfolio diversification. This indication casts significant doubt on the ‘return to risk-taking’ justification for capital property income received by wealthy private households.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://hdl.handle.net/10.1080/00036846.2011.619498
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 45 (2013)
    Issue (Month): 11 (April)
    Pages: 1481-1492

    as in new window
    Handle: RePEc:taf:applec:45:y:2013:i:11:p:1481-1492

    Contact details of provider:
    Web page: http://www.tandfonline.com/RAEC20

    Order Information:
    Web: http://www.tandfonline.com/pricing/journal/RAEC20

    Related research

    Keywords:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:taf:applec:45:y:2013:i:11:p:1481-1492. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.