How to quantify the influence of correlations on investment diversification
When 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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Merton, Robert C., 1972. "An Analytic Derivation of the Efficient Portfolio Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(04), pages 1851-1872, September.
- Statman, Meir, 1987. "How Many Stocks Make a Diversified Portfolio?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(03), pages 353-363, September.
- Smimou, K. & Bector, C.R. & Jacoby, G., 2008. "Portfolio selection subject to experts' judgments," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 1036-1054, December.
- Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
- Matus Medo & Yury M. Pis'mak & Yi-Cheng Zhang, 2008. "Diversification and limited information in the Kelly game," Papers 0803.1364, arXiv.org, revised Jul 2008.
- Elton, Edwin J & Gruber, Martin J, 1977. "Risk Reduction and Portfolio Size: An Analytical Solution," The Journal of Business, University of Chicago Press, vol. 50(4), pages 415-37, October.
- Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-78, July.
- Myron S. Scholes, 2000. "Crisis and Risk Management," American Economic Review, American Economic Association, vol. 90(2), pages 17-21, May.
- Chris Whitrow, 2007. "Algorithms for optimal allocation of bets on many simultaneous events," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 56(5), pages 607-623.
- Valery Polkovnichenko, 2005. "Household Portfolio Diversification: A Case for Rank-Dependent Preferences," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1467-1502.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- John Lintner, 1965. "Security Prices, Risk, And Maximal Gains From Diversification," Journal of Finance, American Finance Association, vol. 20(4), pages 587-615, December.
- Paolo Laureti & Matus Medo & Yi-Cheng Zhang, 2007.
"Analysis of Kelly-optimal portfolios,"
0712.2771, arXiv.org, revised Apr 2009.
- Meric, Ilhan & Ratner, Mitchell & Meric, Gulser, 2008. "Co-movements of sector index returns in the world's major stock markets in bull and bear markets: Portfolio diversification implications," International Review of Financial Analysis, Elsevier, vol. 17(1), pages 156-177.
- Markowitz, Harry M, 1976. "Investment for the Long Run: New Evidence for an Old Rule," Journal of Finance, American Finance Association, vol. 31(5), pages 1273-86, December.
- Medo, Matúš & Pis’mak, Yury M. & Zhang, Yi-Cheng, 2008. "Diversification and limited information in the Kelly game," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(24), pages 6151-6158.
- Laurent Laloux & Pierre Cizeau & Jean-Philippe Bouchaud & Marc Potters, 1998. "Noise dressing of financial correlation matrices," Science & Finance (CFM) working paper archive 500051, Science & Finance, Capital Fund Management.
- Olibe, Kingsley O. & Michello, Franklin A. & Thorne, Jerry, 2008. "Systematic risk and international diversification: An empirical perspective," International Review of Financial Analysis, Elsevier, vol. 17(4), pages 681-698, September.
When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:18:y:2009:i:1-2:p:34-39. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.