Investor preferences and portfolio selection: is diversification an appropriate strategy?

Abstract

This paper analyzes the relationship between diversification and several distributional characteristics that have risk implications for stock returns. We develop a flexible three-parameter distribution to model the stock returns. Using data on the current 30 DJIA stocks, we show that an investor's strategy on diversification depends on the measures of risk for particular concerns. For example, investors who desire to increase positive skewness would hold a less diversified portfolio, while those who care more about extreme losses would hold a more diversified portfolio. Experimenting with a more general pool of stocks yields the same conclusions.Diversification, Asymmetric Generalized t distribution, Skewness,

Can downside-risk measures help to explain the reluctance of households to invest in XTFs? An empirical study using the SHS-base

“…This effect might be due to higher levels of diversification inherent to the benchmark portfolios since they are based on XTFs (see, e.g. Hueng and Yau, 2006; Mitton and Vorkink, 2007; Kim, 2015).…”

“…This effect might be due to higher levels of diversification inherent to the benchmark portfolios since they are based on XTFs (see, e.g. Hueng and Yau, 2006;Mitton and Vorkink, 2007;Kim, 2015). Benchmark portfolios of HPT 1 and HPT 2 reveal slightly higher SDs than the corresponding HPT portfolios on average.…”

“…Individuals reveal preferences for asymmetric return distributions with positive skewness (see Arditti, 1967; Barberis and Huang, 2008; Kumar, 2009). In order to raise the chance to obtain positively skewed returns, it can be reasonable from their perspective to abstain from expanding portfolio diversification (see Simkowitz and Beedles, 1978; Conine and Tamarkin, 1981; Hueng and Yau, 2006; Mitton and Vorkink, 2007; Kim, 2015). Hence, preferences for skewed returns might motivate households to refuse to invest in diversified XTFs.…”

A new fuzzy random multi-objective portfolio model with different entropy measures using fuzzy programming based on artificial bee colony algorithm

“…As pointed out in Bera and Park (2008), DeMiguel et al (2009), the portfolio weights from the traditional M-V model often focus on a few securities or extreme positions even if an important aim of security distribution is diversification. When the portfolio weights are more diversified, the risk for the portfolio is reduced (James Hueng and Yau, 2006). Moreover, the portfolio variance decreases as portfolio diversification increases.…”