Journal of Investment Management, Forthcoming
Posted: 19 Jan 2012 Last revised: 2 Feb 2015
Date Written: January 18, 2012
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: 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