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The Downside Risk of Heavy Tails induces Low Diversification

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Author Info

  • Namwon Hyung

    (University of Seoul)

  • Casper G. de Vries

    (Erasmus University Rotterdam)

Abstract

Actual portfolios contain fewer stocks than are implied by standard financial analysis that balances the costs of diversification against the benefits in terms of the standard deviation of the returns. Suppose a safety first investor cares about downside risk and recognizes the heavytail feature of the asset return distributions. Then we show that optimal portfolio sizes are smaller than traditional correlation based diversificationanalysis suggests.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-082/2.

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Date of creation: 26 Aug 2010
Date of revision:
Handle: RePEc:dgr:uvatin:20100082

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Web page: http://www.tinbergen.nl

Related research

Keywords: Portfolio diversification; downside risk; heavy tails;

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Cited by:
  1. Hyung, Namwon & de Vries, Casper G., 2012. "Simulating and calibrating diversification against black swans," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1162-1175.

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