Equity portfolio diversification with high frequency data

Vitali Alexeev and Mardi Dungey

No 2013-18, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

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 ?nd 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, instead of 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 (search for similar items in EconPapers)
JEL-codes: C63 G11 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2013-11-01, Revised 2013-11-01
New Economics Papers: this item is included in nep-mst and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published by the University of Tasmania. Discussion paper series N 2013-19

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Journal Article: Equity portfolio diversification with high frequency data (2015)
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