 Multi-dimensional portfolio risk and its diversification: A noteWoohwan Kim, Young Min Kim, Tae-Hwan Kim () and Seungbeom Bang Global Finance Journal, 2018, vol. 35, issue C, 147-156 Abstract: We propose that the “risk” of a portfolio has three components: variance, skewness, and kurtosis. Whereas most previous papers have focused on how variance is diversified, we use both analysis and simulations to investigate how skewness and kurtosis are diversified when the number of stocks in a well-diversified portfolio is increased. We find that, first, when a portfolio is skewed and fat-tailed, its variance, skewness, and kurtosis are simultaneously reduced as the number of risky assets in the portfolio increases. When the risky assets in a portfolio are moderately correlated, the three components tend to decrease and eventually converge to nonzero values, which define the portfolio's true multidimensional systematic risk and hence allow diversification of its multidimensional nonsystematic risk. Second, the skewness risk of a portfolio tends to decrease more slowly than variance and kurtosis risk, indicating that, among the three, skewness is the hardest to diversify. Keywords: Diversification; Skewness; Kurtosis; Systematic risk; Multidimensional risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:35:y:2018:i:c:p:147-156 DOI: 10.1016/j.gfj.2017.10.001 Access Statistics for this article Global Finance Journal is currently edited by Manuchehr Shahrokhi More articles in Global Finance Journal from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.