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Portfolio Diversification

James A. Bennett

University of Southern Maine

Richard W. Sias

University of Arizona - Department of Finance

January 15, 2010

This study clears up misunderstandings regarding the diversification of unsystematic risk. Contrary to conventional wisdom, there is no evidence investors can, or have ever been able to, easily form portfolios containing negligible exposure to unsystematic returns. Because well-diversified portfolios are the bedrock upon which so much financial theory is built, investors’ inability to easily form well-diversified portfolios helps explain the persistence of anomalies and the possibility of “bubbles” in asset prices.

Number of Pages in PDF File: 39

Keywords: limits to arbitrage, anomalies, idiosyncratic risk, market efficiency, well-diversified portfolios

JEL Classification: G00, G14

working papers series

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Date posted: May 25, 2005 ; Last revised: February 6, 2010

Suggested Citation

Bennett, James A. and Sias, Richard W., Portfolio Diversification (January 15, 2010). Available at SSRN: http://ssrn.com/abstract=728585 or http://dx.doi.org/10.2139/ssrn.728585

Contact Information

James A. Bennett
University of Southern Maine ( email )
Portland, ME 04104
United States
Richard W. Sias (Contact Author)
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
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