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Higher-order moments in the theory of diversification and portfolio composition

  • Trino-Manuel Niguez
  • Ivan Paya
  • David Peel
  • Javier Perote

This paper revisits the corner solution in classical portfolio choice theory in which risk-averse agents would all be optimally plungers rather than diversifiers. We examine the effect of higher-order moments of two-, three- and four-parameter density functions on the investor's decision to diversify in an expected utility framework. The empirical analysis provides estimates of four parametric and two semi-nonparametric densities for the S&P500 and concluded that allocation of all wealth in the risky asset would not have been optimal.

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Paper provided by Lancaster University Management School, Economics Department in its series Working Papers with number 18297128.

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Date of creation: 2013
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Handle: RePEc:lan:wpaper:18297128
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