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The Illusion of Thin-Tails Under Aggregation

Journal of Investment Management, Forthcoming

Posted: 19 Jan 2012 Last revised: 2 Feb 2015

Nassim Nicholas Taleb

NYU-Tandon School of Engineering

George A. Martin

affiliation not provided to SSRN

Date Written: January 18, 2012

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.

Keywords: Risk, Portfolio Theory, Treynor, Markowitz

Suggested Citation

Taleb, Nassim Nicholas and Martin, George A., The Illusion of Thin-Tails Under Aggregation (January 18, 2012). Journal of Investment Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1987562 or http://dx.doi.org/10.2139/ssrn.1987562

Nassim Nicholas Taleb (Contact Author)

NYU-Tandon School of Engineering ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

George A. Martin

affiliation not provided to SSRN ( email )

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