Is More Always Better? Empirical Evidence on Optimal Portfolio Size

Alla A Melkumian () and Arsen V Melkumian ()
Additional contact information
Alla A Melkumian: College of Business and Technology, Western Illinois University, 1 University Circle, Macomb, IL 61455-1390, USA.
Arsen V Melkumian: College of Business and Technology, Western Illinois University, 1 University Circle, Macomb, IL 61455-1390, USA.

Eastern Economic Journal, 2009, vol. 35, issue 1, 84-95

Abstract: A restriction on portfolio size results in welfare losses for investors. To measure these welfare losses, we compare n-asset optimal portfolios with 26-asset optimal portfolios using the concept of proportionate opportunity cost. The original historical asset returns data are used with a VAR in generating joint returns distributions for the portfolio formation period. We find that suboptimal diversification imposes substantial costs on investors with low levels of relative risk aversion. Investors with high levels of risk aversion incur very small or no cost at all diversifying sub-optimally. We show that investors with high levels of risk aversion place most of their initial wealth in the safe asset and, therefore, few stocks are needed to achieve optimal diversification. Eastern Economic Journal (2009) 35, 84–95. doi:10.1057/palgrave.eej.9050045

Date: 2009
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.palgrave-journals.com/eej/journal/v35/n1/pdf/9050045a.pdf Link to full text PDF (application/pdf)
http://www.palgrave-journals.com/eej/journal/v35/n1/full/9050045a.html Link to full text HTML (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:easeco:v:35:y:2009:i:1:p:84-95

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/41302

Access Statistics for this article

Eastern Economic Journal is currently edited by Allan Zebedee and Cynthia Bansak

More articles in Eastern Economic Journal from Palgrave Macmillan, Eastern Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().