Abstract

http://ssrn.com/abstract=1855944
 
 

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Idiosyncratic Risk and the Pricing of Poorly-Diversified Portfolios


Joelle Miffre


EDHEC Business School

Chris Brooks


University of Reading - ICMA Centre

Xiafei Li


Nottingham University Business School

May 31, 2011


Abstract:     
This article examines the role of idiosyncratic volatility in explaining the cross-sectional variation of size- and value-sorted portfolio returns. We show that the premium for bearing idiosyncratic volatility varies inversely with the number of stocks included in the portfolios. This conclusion is robust within various multifactor models based on size, value, past performance, liquidity and total volatility and also holds within an ICAPM specification of the risk-return relationship. Our findings thus indicate that investors demand an additional return for bearing the idiosyncratic volatility of poorly-diversified portfolios.

Number of Pages in PDF File: 25

Keywords: idiosyncratic risk, cross-sectional variation in stock returns, CAPM, conditional volatility, risk premium

JEL Classification: G12, G14

working papers series


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Date posted: June 3, 2011 ; Last revised: April 22, 2013

Suggested Citation

Miffre, Joelle and Brooks, Chris and Li, Xiafei, Idiosyncratic Risk and the Pricing of Poorly-Diversified Portfolios (May 31, 2011). Available at SSRN: http://ssrn.com/abstract=1855944 or http://dx.doi.org/10.2139/ssrn.1855944

Contact Information

Joelle Miffre (Contact Author)
EDHEC Business School ( email )
58 rue du Port
Lille, 59046
France
Chris Brooks
University of Reading - ICMA Centre ( email )
Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)
Xiafei Li
Nottingham University Business School ( email )
Jubilee Campus
Nottingham, NG8 1BB
United Kingdom
+44 (0)115 9518603 (Phone)
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