Dispersion

22 Pages Posted: 15 Oct 2004

See all articles by Meir Statman

Meir Statman

Santa Clara University - Department of Finance

Jonathan Scheid

Assante Asset Management Inc.

Date Written: October 2004

Abstract

Correlation is the common measure of the benefits of diversification, but dispersion, measured as the standard deviation of the returns of stocks around the mean of all stocks, is better. This is for two reasons. First, the benefits of diversification depend not only on the correlations between stock returns but also on the standard deviations of stock returns. Dispersion accounts for both. Second, dispersion provides an intuitive measure of the benefits of diversification while correlation does not. We show the relationship between dispersion, correlation and standard deviation and analyze the dispersion of U.S. stocks during 1980-2003.

Keywords: Behavioral finance, diversification, correlation, dispersion, portfolio theory

JEL Classification: G11, G12

Suggested Citation

Statman, Meir and Scheid, Jonathan, Dispersion (October 2004). Available at SSRN: https://ssrn.com/abstract=603682 or http://dx.doi.org/10.2139/ssrn.603682

Meir Statman (Contact Author)

Santa Clara University - Department of Finance ( email )

500 El Camino Real
Santa Clara, CA 95053
United States
408-554-4147 (Phone)
408-554-4029 (Fax)

Jonathan Scheid

Assante Asset Management Inc. ( email )

1190 Saratoga Avenue, Suite 200
San Jose, CA 95129
United States

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