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Diversification Is Not a Free Lunch

Author

Listed:
  • Dirk G. Baur

    (UWA Business School, The University of Western Australia, Crawley, WA 6009, Australia)

Abstract

This study analyzed the statement “diversification is a free lunch”. We empirically showed that diversification is only a free lunch under uncertainty or ignorance, confirming Warren Buffett’s “diversification is protection against ignorance”. Using historical returns of the S&P500 constituents illustrated that diversification not only decreased the risk but also the returns if the expected returns could be estimated. The findings of this study highlight that diversification reduces risk but that the risk reduction is not for free.

Suggested Citation

  • Dirk G. Baur, 2024. "Diversification Is Not a Free Lunch," JRFM, MDPI, vol. 17(6), pages 1-13, May.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:6:p:225-:d:1402811
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    References listed on IDEAS

    as
    1. Zakamouline, Valeri & Koekebakker, Steen, 2009. "Portfolio performance evaluation with generalized Sharpe ratios: Beyond the mean and variance," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1242-1254, July.
    2. Sergio Ortobelli Lozza, 2001. "The classification of parametric choices under uncertainty: analysis of the portfolio choice problem," Theory and Decision, Springer, vol. 51(2), pages 297-328, December.
    3. Sergio Ortobelli Lozza & Wing-Keung Wong & Frank J. Fabozzi & Martin Egozcue, 2018. "Diversification versus optimality: is there really a diversification puzzle?," Applied Economics, Taylor & Francis Journals, vol. 50(43), pages 4671-4693, September.
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