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Mean-variance model and investors’ diversification attitude: A theoretical revisit

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  • Koumou, Gilles Boevi

Abstract

In this paper, we re-examine investors’ diversification attitude in the mean-variance model from the perspective of Markowitz’s (1952) principle of diversification. Our analysis is based on diversification returns, the specific Markowitz’s (1952) principle of diversification measure in the mean-variance model. We show, regardless of whether or not the risk-free asset is available, that investors’ diversification attitude is characterized by their risk attitude in the mean-variance model with short sales. More specifically, depending on the mean-variance model inputs, investors’ diversification is an increasing function or an inverted U-shaped concave function of their risk aversion.

Suggested Citation

  • Koumou, Gilles Boevi, 2020. "Mean-variance model and investors’ diversification attitude: A theoretical revisit," Finance Research Letters, Elsevier, vol. 37(C).
    • Handle: RePEc:eee:finlet:v:37:y:2020:i:c:s1544612318306160
    DOI: 10.1016/j.frl.2019.101360
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    References listed on IDEAS

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    1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
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    5. Scott Willenbrock, 2011. "Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle," Papers 1109.1256, arXiv.org.
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    More about this item

    Keywords

    Risk; Diversification; Diversification returns; Mean-variance model;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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