When to Put All Your Eggs in One Basket... When Diversification Increases Portfolio Risk!

7 Pages Posted: 17 Nov 2004

See all articles by Cornelis A. Los

Cornelis A. Los

University of California at Irvine - The Paul Merage School of Business; EMEPS Associates

Date Written: November 14, 2004

Abstract

Portfolio diversification may not always lower the portfolio risk, but may actually increase it. It depends on the distributional stability characteristics and long memory of the underlying rates of return. This disturbing result is based on the theoretical Fama-Samuelson proposition of 1965-67, which extends the portfolio mean-variance diversification results of Markowitz from Gaussian to non-Gaussian stable distributions. This extension is at the cost of introducing third (skewness) and fourth (kurtosis) moments in the diversification space. There exists now ample empirical evidence for it, since most financial return series are non-Gaussian and stable and have long memory, e.g., the S&P500 Index return series.

Keywords: Portfolio management, distibutional stability, long memory, financial risk

JEL Classification: G12, G13, G14, C23

Suggested Citation

Los, Cornelis A., When to Put All Your Eggs in One Basket... When Diversification Increases Portfolio Risk! (November 14, 2004). Available at SSRN: https://ssrn.com/abstract=620081 or http://dx.doi.org/10.2139/ssrn.620081

Cornelis A. Los (Contact Author)

University of California at Irvine - The Paul Merage School of Business ( email )

SB1
Irvine, CA 92697-3125
United States

HOME PAGE: http://merage.uci.edu/research-faculty/faculty-directory/Cornelis-Los.html

EMEPS Associates ( email )

Escondido, CA 92029
United States
760-294-0255 (Phone)
858-635-4783 (Fax)

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