How to quantify the influence of correlations on investment diversification
AbstractWhen assets are correlated, benefits of investment diversification are reduced. To measure the influence of correlations on investment performance, a new quantity - the effective portfolio size - is proposed and investigated in both artificial and real situations. We show that in most cases, the effective portfolio size is much smaller than the actual number of assets in the portfolio and that it lowers even further during financial crises.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 0805.3397.
Date of creation: May 2008
Date of revision: Feb 2009
Publication status: Published in International Review of Financial Analysis 18, 34-39 (2009)
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