The Illusion of Thin-Tails Under Aggregation
Nassim Nicholas Taleb
NYU-Tandon School of Engineering; New England Complex Systems Institute
George A. Martin
affiliation not provided to SSRN
January 18, 2012
Journal of Investment Management, Forthcoming
It is assumed that while portfolio theory fails with daily returns, that it would work with yearly returns, an standard argument recently repeated in Treynor (2011). This paper debunks the confusion that daily returns, when non-Gaussian but with finite variance can aggregate to thin tails. Alas, portfolio theory fails in both the short and the long run. The central limit theorem operates too slowly for economic data for us to use it and take portfolio theory with any degree of seriousness. The point is illustrated with a Monte Carlo simulation.
Keywords: Risk, Portfolio Theory, Treynor, Markowitz
Date posted: January 19, 2012 ; Last revised: February 2, 2015
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