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.

downside risk, haivy tails, portfolio diversification
Econometric Methods: Single Equation Models; Single Variables (jel C2), Financial Economics: General (jel G0), General Financial Markets (jel G1)
Tinbergen Institute
Tinbergen Institute Discussion Paper Series
Discussion paper / Tinbergen Institute
Tinbergen Institute

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