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Why Should Naive Investors Avoid Stock Markets ?

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  • Michael Donadelli

    ()
    (Department of Economics, University Of Venice Cà Foscari)

  • Federico Silvestri

    (Allianz Investment Management Spa Milan)

Abstract

The goal of this paper is to present an original and simple analysis aimed to understand why investing in capital markets can be very dangerous for “naive investors”. Stock markets are characterized by instability and subjected to external shocks. The probability of making money on them is often very low, especially in high volatility periods. We will show that, in absence of any “wise” asset allocation strategy and not being professional investors, a risk-free portfolio may perform better than a portfolio composed entirely by risky assets.

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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2010/WP_DSE_Donadelli_Silvestri_19_10.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2010_19.

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Length: 19
Date of creation: 2010
Date of revision:
Handle: RePEc:ven:wpaper:2010_19

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Keywords: Asset Allocation; Investment Strategies; Stock Markets; Risk-Free Securities;

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  1. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 34(1), pages 42-71, March.
  2. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  3. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, American Finance Association, vol. 54(3), pages 953-980, 06.
  4. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, American Finance Association, vol. 7(1), pages 77-91, 03.
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