Essentials of Portfolio Diversification Strategy

Mao, James C. T.

doi:10.2307/2325582

Cited by 26 publications

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“…In another study from this era, Mao (1970) does a theoretical analysis that incorporates the impact of transactions costs. Mao defines the maximum possible gain from diversification as the where θ n is the ratio of the portfolio's mean return to its standard deviation.…”

Section: Studies In Economics and Finance -Autumn 2003 41mentioning

confidence: 99%

“…They use the method pioneered by Evans and Archer (1968) and conclude that 30 to 50 Canadian stocks are required to capture most of the benefits associated with diversification. Levy and Livingston (1995) use a theoretical approach consistent with Markowitz (1959) and Mao (1970). Levy and Livingston support the traditional textbook recommendation of a smaller portfolio size when all assets have the same covariance, the correlation between assets is .5 and there are no transactions costs.…”

Section: Studies In Economics and Finance -Autumn 2003 41mentioning

confidence: 99%

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Portfolio Diversification for Long Holding Periods: How Many Stocks Do Investors Need?

Domian

Louton

Racine

2003

Studies in Economics and Finance

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Access to this document was granted through an Emerald subscription provided by emeraldsrm: 463575 [] For AuthorsIf you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. Finance textbooks typically state that 8 to 20 stocks can provide adequate diversification for a portfolio. However, these recommendations usually assume a short time horizon such as one year. We examine 20-year cumulative rates of return and ending wealth from an initial $100,000 investment allocated among 100 large U.S. stocks. Probability distributions obtained from simulations illustrate the shortfall risk faced by investors who own fewer titan 100 stocks. Five percent of the 20-stock portfolios have ending wealth shortfalls exceeding 28%. These findings suggest that 8to 20 stocks may be insufficient for long-term investors.

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Section: Studies In Economics and Finance -Autumn 2003 41mentioning

confidence: 99%

Section: Studies In Economics and Finance -Autumn 2003 41mentioning

confidence: 99%

Portfolio Diversification for Long Holding Periods: How Many Stocks Do Investors Need?

Domian

Louton

Racine

2003

Studies in Economics and Finance

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“…Transaction cost is one of the main concerns for portfolio managers and helps in constructing more realistic models, which incorporate market frictions. [12][13][14] Some studies consider portfolio optimization with fixed transaction costs; [15,16] on the other hand, there are studies considering variable transaction costs that changes as proportion of the amount of assets traded. [6,[17][18][19][20] Since the introduction of the mean-variance model, [1] variance is widely used as a risk measure; however, it has limitations.…”

Section: Introductionmentioning

confidence: 99%

A multiobjective portfolio rebalancing model incorporating transaction costs based on incremental discounts

Mittal

Mehlawat

2014

Optimization

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In this paper, we propose a multiobjective model of portfolio rebalancing problem considering return, risk and liquidity as key financial criteria. Further, a more realistic situation of financial market is considered where the portfolio, at the end of a typical time period, will be modified by buying and/or selling asset(s) in response to changing conditions. We assume that the transaction costs are paid on the basis of incremental discounts and are adjusted in the net return of the portfolio. A real-coded genetic algorithm (RGGA) is developed to solve the portfolio rebalancing problem and build an optimal portfolio. An empirical study is included to illustrate the behaviour of the proposed model using data of some randomly selected assets listed on the National Stock Exchange (NSE), Mumbai, India.

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“…For example, Mao (1970), Jacob (1974), Brennan (1975), Levy (1978), Patel and Subrahmanya m (1982) and Morton and Pliska (1995) examined the ® xed-transaction-cost s problem. Pogue (1970), Chen et al (1971), Loeb (1983) , Davis and Norman (1990), and Yoshimoto (1996) analysed the variable-transaction-cost s problem.…”

Section: Introductionmentioning

confidence: 99%

Optimal portfolio selection of assets with transaction costs and no short sales

Li¹,

Li²,

Wang³

et al. 2001

International Journal of Systems Science

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In this paper we study the optimal portfolio selection problem for assets. A doubleobjective programming model is Wrst formulated for selecting optimal portfolios of asserts with transaction costs and taxes, where short sales and borrowings are not allowed. Some properties of eYcient portfolios and the eYcient frontier to the model are then derived. Based on these results, an interactive method that requires only paired preference comparison from the investor is established for solving the optimal portfolio selection problem. A numerical example is also presented to illustrate this method.Nomenclature d i dividend yield on risk asset i, equal to the monetary dividend divided by the current price k i (per unit change) transaction cost of the ith risky asset, k i 5 0, iˆ1; . . . ; n r i equal to E‰r r i Š, the expected value ofr r i …iˆ1; . . . ; n † r n ‡1 holding period rate of return on the riskless asset r r i holding period rate of return on risky asset i …iˆ1; . . . ; n †, equal to the ratio of the value of the asset at the end of the period to its current value t g marginal capital gains tax rate for the investor t 0 marginal ordinary income tax rate for the investor x i proportion of wealth that the investor will invest in the ith risky asset …iˆ1; . . . ; n † or the riskless asset …iˆn ‡ 1 †x 0 i proportion of wealth that the investor already holds in the ith risky asset …iˆ1; . . . ; n † or the riskless asset …iˆn ‡ 1 † ¼ ij equal to cov…r r i ;r r j †, the covariance betweenr r i and r r j , i; jˆ1; . . . ; n (note that the variance± covariance matrix …¼ ij † n£n is positive semide® nite).

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Essentials of Portfolio Diversification Strategy

Cited by 26 publications

References 0 publications

Portfolio Diversification for Long Holding Periods: How Many Stocks Do Investors Need?

Portfolio Diversification for Long Holding Periods: How Many Stocks Do Investors Need?

A multiobjective portfolio rebalancing model incorporating transaction costs based on incremental discounts

Optimal portfolio selection of assets with transaction costs and no short sales

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