Non-Gaussian diversification: When size matters
Classical portfolio theory informs investors that they should have a large number of assets in their portfolios in order to diversify risk. We show that the non-Gaussian features of stock return distribution may not allow for this risk protection in times of crisis. Moreover, we demonstrate empirically that, if investors are risk-averse and consider higher order moments, they have numerous incentives not to diversify their portfolios fully. This is caused by the evolution of both large losses and asymmetry of returns when the numbers of assets in a portfolio change.
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.:
- William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
- Leyuan You & Robert T. Daigler, 2010. "Using Four-Moment Tail Risk to Examine Financial and Commodity Instrument Diversification," The Financial Review, Eastern Finance Association, vol. 45(4), pages 1101-1123, November.
- Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-126, March.
- French, Kenneth R & Poterba, James M, 1991.
"Investor Diversification and International Equity Markets,"
American Economic Review,
American Economic Association, vol. 81(2), pages 222-226, May.
- Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
- John L. Evans & Stephen H. Archer, 1968. "Diversification And The Reduction Of Dispersion: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 23(5), pages 761-767, December.
- 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.
- Thierry Ane & Cecile Kharoubi, 2003. "Dependence Structure and Risk Measure," The Journal of Business, University of Chicago Press, vol. 76(3), pages 411-438, July.
- Victor DeMiguel & Lorenzo Garlappi & Raman Uppal, 2009. "Optimal Versus Naive Diversification: How Inefficient is the 1-N Portfolio Strategy?," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1915-1953, May.
- William N. Goetzmann & Alok Kumar, 2008. "Equity Portfolio Diversification," Review of Finance, European Finance Association, vol. 12(3), pages 433-463.
- William N. Goetzmann & Alok Kumar, 2001. "Equity Portfolio Diversification," NBER Working Papers 8686, National Bureau of Economic Research, Inc.
- Alok Kumar & William N. Goetzmann, 2001. "Equity Portfolio Diversification," Yale School of Management Working Papers ysm236, Yale School of Management.
- William N. Goetzmann & Alok Kumar, 2004. "Equity Portfolio Diversification," Yale School of Management Working Papers ysm17, Yale School of Management.
- Carol C. Bertaut & Martha Starr-McCluer, 2000. "Household portfolios in the United States," Finance and Economics Discussion Series 2000-26, Board of Governors of the Federal Reserve System (U.S.).
- Kelly, Morgan, 1995. "All their eggs in one basket: Portfolio diversification of US households," Journal of Economic Behavior & Organization, Elsevier, vol. 27(1), pages 87-96, June.
- Geman, Hélyette & Kharoubi, Cécile, 2008. "WTI crude oil Futures in portfolio diversification: The time-to-maturity effect," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2553-2559, December.
- You, Leyuan & Daigler, Robert T., 2010. "Is international diversification really beneficial?," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 163-173, January.
- Richardson, Matthew & Smith, Tom, 1993. "A Test for Multivariate Normality in Stock Returns," The Journal of Business, University of Chicago Press, vol. 66(2), pages 295-321, April.
- Carol C. Bertaut, 1998. "Stockholding Behavior Of U.S. Households: Evidence From The 1983-1989 Survey Of Consumer Finances," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 263-275, May.
- 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. Full references (including those not matched with items on IDEAS)