The Downside Risk of Heavy Tails induces Low Diversification
Actual portfolios contain fewer stocks than are implied by standard financial analysis that balances the costs of diversification against the benefits in terms of the standard deviation of the returns. Suppose a safety first investor cares about downside risk and recognizes the heavy tail feature of the asset return distributions. Then we show that optimal portfolio sizes are smaller than traditional correlation based diversification analysis suggests.
|Keywords||downside risk, haivy tails, portfolio diversification|
|JEL||C2, Econometric Methods: Single Equation Models; Single Variables (jel), G0, Financial Economics: General (jel), G1, General Financial Markets (jel)|
Hyung, N, & de Vries, C.G. (2010). The Downside Risk of Heavy Tails induces Low Diversification (No. TI 2010-082/2). Discussion paper / Tinbergen Institute. Tinbergen Institute. Retrieved from http://hdl.handle.net/1765/20749