When to Put All Your Eggs in One Basket.....When Diversification Increases Portfolio Risk!
AbstractPortfolio diversification may not always lower the portfolio risk, but may actually increase it. It depends on the long memory and distributional stability characteristics of the underlying rates of return. This disturbing result is based on the theoretical Fama- Samuelson proposition of 1965-67. However, there exists now ample empirical evidence for such peculiar results, since most financial return series show long memory, e.g., the S&P500 Index return series. Illiquid real estate and bank loan values are sometimes subject to catastrophic discontinuities. Adding these assets to the portfolio may increase its risk drastically.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0411037.
Length: 7 pages
Date of creation: 16 Nov 2004
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Note: Type of Document - pdf; pages: 7
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portfolio management; distibutional stability; long memory; financial risk;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
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- Eugene F. Fama, 1965. "Portfolio Analysis in a Stable Paretian Market," Management Science, INFORMS, vol. 11(3), pages 404-419, January.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Samuelson, Paul A., 1967. "Efficient Portfolio Selection for Pareto-Lévy Investments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(02), pages 107-122, June.
- Cornelis A. Los, 2004.
"Why VAR Fails: Long Memory and Extreme Events in Financial Markets,"
- Cornelis A Los, 2005. "Why VaR FailsLong Memory and Extreme Events in Financial Markets," The IUP Journal of Financial Economics, IUP Publications, vol. 0(3), pages 19-36, September.
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