On Diversification

38 Pages Posted: 21 Nov 2012

See all articles by Ben Jacobsen

Ben Jacobsen

Tilburg University - TIAS School for Business and Society; Massey University

Frans de Roon

Tilburg University - Department of Finance

Date Written: November 21, 2012


Undiversified - or stock picking - portfolios may dominate well diversified benchmarks, when these benchmarks are not mean-variance efficient. Starting from Markowitz's Modern Portfolio Theory we derive simple (linear regression) tests to separate stock picking from diversification. Over 60% of the time we cannot reject our null hypothesis of stock picking in favor of well diversified benchmarks, even for individual stocks. Stock picking dominates during recessions, diversification during expansions. 'Stockpicking' stocks tend to be stocks of large size companies, stocks with high B/M, high E/P or Momentum stocks. Our new tests also explicitly relate diversification and return predictability.

Keywords: Diversification, Stock Picking, Modern Portfolio Theory, Return Predictability

JEL Classification: G11, G12, G14

Suggested Citation

Jacobsen, Ben and de Roon, Frans A., On Diversification (November 21, 2012). Available at SSRN: https://ssrn.com/abstract=2179180 or http://dx.doi.org/10.2139/ssrn.2179180

Ben Jacobsen (Contact Author)

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB

Massey University ( email )

New Zealand

Frans A. De Roon

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)

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