Equity Portfolio Diversification With High Frequency Data

Quantitative Finance, 2015, Vol. 15, No. 7, pp. 1205–1215

24 Pages Posted: 12 Aug 2019

See all articles by Vitali Alexeev

Vitali Alexeev

University of Technology Sydney

Mardi H. Dungey

University of Tasmania (deceased); Financial Research Network (FIRN) (deceased)

Date Written: October 3, 2014

Abstract

Investors wishing to achieve a particular level of diversification may be misled on how many stocks to hold in a portfolio by assessing the portfolio risk at different data frequencies. High frequency intradaily data provide better estimates of volatility, which translate to more accurate assessment of portfolio risk. Using 5-minute, daily and weekly data on S&P500 constituents for the period from 2003 to 2011 we find that for an average investor wishing to diversify away 85% (90%) of the risk, equally weighted portfolios of 7 (10) stocks will suffice, irrespective of the data frequency used or the time period considered. However, to assure investors of a desired level of diversification 90% of the time (in contrast to on average), using low frequency data results in an exaggerated number of stocks in a portfolio when compared with the recommendation based on 5-minute data. This difference is magnified during periods when financial markets are in distress, as much as doubling during the 2007-2009 financial crisis.

Keywords: portfolio diversification, high frequency, realized variance, realized correlation

JEL Classification: G11, C58, C63

Suggested Citation

Alexeev, Vitali and Dungey, Mardi H., Equity Portfolio Diversification With High Frequency Data (October 3, 2014). Quantitative Finance, 2015, Vol. 15, No. 7, pp. 1205–1215, Available at SSRN: https://ssrn.com/abstract=3434354

Vitali Alexeev (Contact Author)

University of Technology Sydney ( email )

UTS Business School
PO Box 123, Broadway
Sydney, NSW
Australia

HOME PAGE: http://valexeev.yolasite.com

Mardi H. Dungey

University of Tasmania (deceased)

Financial Research Network (FIRN) (deceased)

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