Portfolio Diversification

39 Pages Posted: 25 May 2005 Last revised: 6 Feb 2010

See all articles by James A. Bennett

James A. Bennett

University of Southern Maine

Richard W. Sias

University of Arizona - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2010


This study clears up misunderstandings regarding the diversification of unsystematic risk. Contrary to conventional wisdom, there is no evidence investors can, or have ever been able to, easily form portfolios containing negligible exposure to unsystematic returns. Because well-diversified portfolios are the bedrock upon which so much financial theory is built, investors’ inability to easily form well-diversified portfolios helps explain the persistence of anomalies and the possibility of “bubbles” in asset prices.

Keywords: limits to arbitrage, anomalies, idiosyncratic risk, market efficiency, well-diversified portfolios

JEL Classification: G00, G14

Suggested Citation

Bennett, James A. and Sias, Richard W., Portfolio Diversification (January 15, 2010). Available at SSRN: https://ssrn.com/abstract=728585 or http://dx.doi.org/10.2139/ssrn.728585

James A. Bennett

University of Southern Maine ( email )

Portland, ME 04104
United States

Richard W. Sias (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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