The Downside Risk of Heavy Tails induces Low Diversification
AbstractActual 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 InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-082/2.
Date of creation: 26 Aug 2010
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Portfolio diversification; downside risk; heavy tails;
Find related papers by JEL classification:
- G0 - Financial Economics - - General
- G1 - Financial Economics - - General Financial Markets
- C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
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- 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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