Portfolio Size, Portfolio Composition, and the Skewness of Returns
66 Pages Posted: 23 May 2024
Abstract
This paper examines the skewness of randomly built equally weighted portfolios constructed between 1990 and 2021. Our results show that portfolios tend to exhibit lower and more negative skewness when they have more assets, and when they contain larger and growth stocks. We explain our results using a model in which investors adjust their perceptions of a security’s value in response to the arrival of public information. Our model predicts that the skewness of a single asset's (resp. portfolio's) return should be positive (resp. negative), and that portfolio skewness should be smaller (and more negative) when composed of larger firms whose fundamental value is more uncertain.
Keywords: Asset returns and portfolio skewness, News arrival, Skewness aggregation, Skewness seasonality, Size and book-to-market portfolios
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