Diversification Is Not a Free Lunch

Dirk G. Baur ()
Additional contact information
Dirk G. Baur: UWA Business School, The University of Western Australia, Crawley, WA 6009, Australia

JRFM, 2024, vol. 17, issue 6, 1-13

Abstract: This study analyzed the statement “diversification is a free lunch”. We empirically showed that diversification is only a free lunch under uncertainty or ignorance, confirming Warren Buffett’s “diversification is protection against ignorance”. Using historical returns of the S&P500 constituents illustrated that diversification not only decreased the risk but also the returns if the expected returns could be estimated. The findings of this study highlight that diversification reduces risk but that the risk reduction is not for free.

Keywords: diversification; free lunch; protection; ignorance; Sharpe ratio; portfolio optimization; Harry Markowitz (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/1911-8074/17/6/225/pdf (application/pdf)
https://www.mdpi.com/1911-8074/17/6/225/ (text/html)

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:gam:jjrfmx:v:17:y:2024:i:6:p:225-:d:1402811

Access Statistics for this article

JRFM is currently edited by Ms. Chelthy Cheng

More articles in JRFM from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().