This study investigates the existence of psychological barriers in the Dow Jones Industrial Average, the S&P 500, and six foreign stock indices. It is believed by many in the investment community that index levels that are multiples of 100 serve as barriers, and that markets may resist crossing these barriers. Although return dynamics in the neighborhood of barrier points are not identical for all series studied, we find aberrations in the conditional means and variances consistent with psychological barriers. In five of the eight indices studied, conditional mean returns are significantly higher after crossing a barrier as part of an upward move, while only two series exhibit significant mean effects after crossing a barrier as part of a downward move. In seven of the eight series studied, we find significant conditional variance effects coincident with a barrier crossing. In addition, most series exhibit evidence of autoregressive conditional heteroskedastic (ARCH), generalized ARCH (GARCH), and leverage effects.

This paper uses a large individual-level data set to isolate the effects of risk tolerance on portfolio composition. We test and confirm two predictions of the Capital Asset Pricing Model: (1) increased risk tolerance reduces an individual’s propensity to purchase risk-free assets; and (2) higher risk tolerance does not affect the composition of an individual’s portfolio of risky assets. More specifically, we find that risk tolerant investors nearing retirement do not reduce their bond allocations in order to buy more stock. © 2000 Elsevier Science Inc. All rights reserved.

We examine returns and ending wealth in portfolios selected from 1,000 large U.S. stocks over a 20-year holding period. Shortfall risk, the possibility of ending wealth being below a target, is a useful metric for long horizon investors and is consistent with the Safety First criterion. Density functions obtained from simulations illustrate that shortfall risk reduction continues as portfolio size is increased, even above 100 stocks. A slightly lower risk can be achieved in small portfolios by diversifying across industries, but a greater reduction is obtained by simply increasing the number of stocks. Copyright 2007, The Eastern Finance Association.

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