When to Put All Your Eggs in One Basket.....When Diversification Increases Portfolio Risk!

Cornelis Los

Finance from University Library of Munich, Germany

Abstract: Portfolio diversification may not always lower the portfolio risk, but may actually increase it. It depends on the long memory and distributional stability characteristics of the underlying rates of return. This disturbing result is based on the theoretical Fama- Samuelson proposition of 1965-67. However, there exists now ample empirical evidence for such peculiar results, since most financial return series show long memory, e.g., the S&P500 Index return series. Illiquid real estate and bank loan values are sometimes subject to catastrophic discontinuities. Adding these assets to the portfolio may increase its risk drastically.

Keywords: portfolio management; distibutional stability; long memory; financial risk (search for similar items in EconPapers)
JEL-codes: C23 G12 G13 G14 (search for similar items in EconPapers)
Pages: 7 pages
Date: 2004-11-16
New Economics Papers: this item is included in nep-fin
Note: Type of Document - pdf; pages: 7
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0411/0411037.pdf (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:wpa:wuwpfi:0411037

Access Statistics for this paper

More papers in Finance from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).