The Downside Risk of Heavy Tails induces Low Diversification
June 2010
Research Paper
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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
Classifications using
Journal of Economic Literature (JEL) Classification System
- G0 : Financial Economics: General
- G1 : General Financial Markets
- C2 : Econometric Methods: Single Equation Models; Single Variables
Automatically Extracted Terms
- portfolio
- diversification
- stock
- level
- return
- benefit
- distribution
- measure
- investor
- downside
- downside risk
- variance
- result
- deviation
- risk level
- v 2 n
- statman
- probability
- downside risk measures
- analysis
