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The Illusion of Thin-Tails Under AggregationNassim Nicholas TalebNYU-Poly George A. Martinaffiliation not provided to SSRN January 18, 2012 Journal of Investment Management, Forthcoming Abstract: 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.
Number of Pages in PDF File: 4 Keywords: Risk, Portfolio Theory, Treynor, Markowitz Accepted Paper SeriesDate posted: January 19, 2012 ; Last revised: November 16, 2012Suggested Citation |
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