Risk reduction and Diversification within Markowitz's Mean-Variance Model: Theoretical Revisit

Nettey Boevi Gilles Koumou ()

Papers from arXiv.org

Abstract: The conventional wisdom of mean-variance (MV) portfolio theory asserts that the nature of the relationship between risk and diversification is a decreasing asymptotic function, with the asymptote approximating the level of portfolio systematic risk or undiversifiable risk. This literature assumes that investors hold an equally-weighted or a MV portfolio and quantify portfolio diversification using portfolio size. However, the equally-weighted portfolio and portfolio size are MV optimal if and only if asset returns distribution is exchangeable or investors have no useful information about asset expected return and risk. Moreover, the whole of literature, absolutely all of it, focuses only on risky assets, ignoring the role of the risk free asset in the efficient diversification. Therefore, it becomes interesting and important to answer this question: how valid is this conventional wisdom when investors have full information about asset expected return and risk and asset returns distribution is not exchangeable in both the case where the risk free rate is available or not? Unfortunately, this question have never been addressed in the current literature. This paper fills the gap.

Date: 2016-08, Revised 2016-08
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1608.05024 Latest version (application/pdf)

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:arx:papers:1608.05024

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().