The Opportunity Cost of Holding a “Naive” Portfolio

Alice A. Melkumian
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Alice A. Melkumian: Western Illinois University

Journal of Economic Insight, 2012, vol. 38, issue 1, 23-42

Abstract: The paper explores the effect of “naive” portfolio strategies on investors’ welfare. A “naive” portfolio as a sub-optimal investment strategy produces sub-optimal asset allocations that result in investors’ welfare losses. To measure those losses I compare sub-optimal portfolios with optimal portfolios using the proportionate opportunity cost with various CRRA utility functions. A vector autoregression is used to generate the joint distribution of asset returns. I show that the opportunity cost of investing in “naive” portfolios does not exceed 16.7% while investing in the optimal number of asset and does not exceed 20.4% while investing in a sub-optimal number of assets.

JEL-codes: G11 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:mve:journl:v:38:y:2012:i:1:p:23-42

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