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Note---Naive Diversification and Portfolio Risk---A Note

Author

Listed:
  • Ron Bird

    (Faculty of Economics and Commerce, Australian National University, GPO Box 4, Canberra, ACT 2601, Australia)

  • Mark Tippett

    (Faculty of Economics and Commerce, Australian National University, GPO Box 4, Canberra, ACT 2601, Australia)

Abstract

A number of authors have used the portfolio standard deviation to model the risk reduction advantages of naive diversification. Other authors have pointed out that when risk is modelled by the portfolio's variance the modelling process becomes much simpler and is computationally more efficient. In this note we derive an exact parametric relationship between portfolio standard deviation and size and thus highlight the dangers of using the standard deviation in conjunction with O.L.S. regression techniques to model the risk reduction advantages of naive diversification. It is then shown that past empirical studies which have used this methodology are deficient.

Suggested Citation

  • Ron Bird & Mark Tippett, 1986. "Note---Naive Diversification and Portfolio Risk---A Note," Management Science, INFORMS, vol. 32(2), pages 244-251, February.
    • Handle: RePEc:inm:ormnsc:v:32:y:1986:i:2:p:244-251
    DOI: 10.1287/mnsc.32.2.244
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