The Diversification Puzzle

StatmanMeir,

doi:10.2469/faj.v60.n4.2636

Cited by 146 publications

(91 citation statements)

References 12 publications

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“…Investors with reverse S-shaped utility functions prefer spot to futures in the bear market when the returns of both spot and futures are negative and futures to spot in the bull market when the returns of both spot and futures are positive. These results add to those in the diversification puzzle of Statman (2004), Egozcue et al (2011) where investors with S-shaped or reverse S-shaped utilities are compatible with the observed behavior of traders holding only a small number of stocks instead of the complete, diversified portfolios suggested in financial theory.…”

Section: Discussion and Concluding Remarkssupporting

confidence: 83%

Theories of Risk: Testing Investor Behaviour on the Taiwan Stock and Stock Index Futures Markets

2017

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Section: Discussion and Concluding Remarkssupporting

confidence: 83%

Theories of Risk: Testing Investor Behaviour on the Taiwan Stock and Stock Index Futures Markets

2017

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“…We are not aware of any subsequent literature 2 that has followed this framework, except Statman (2004). Below we briefly review this analysis.…”

Section: A Cost Benefit Analysis Of Portfolio Sizementioning

confidence: 99%

“…If the risk is measured by the variance of the portfolio return, typical portfolio sizes comprise dozens of different assets. In two perceptive papers Statman (1987Statman ( , 2004 was the first to explicitly consider the trade-off between the costs and benefits of diversification, but found that the theoretical analysis implies more diversification than is observed in reality. Statman (2004) discusses the importance of behavioral aspects of the investor's decision process for closing the gap.…”

Section: Introductionmentioning

confidence: 99%

The Downside Risk of Heavy Tails Induces Low Diversification

Hyung

Vries

2010

SSRN Journal

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Actual portfolios contain fewer stocks than are implied by standard financial analysis that balances the costs of diversification against the benefits in terms of the standard deviation of the returns. Suppose a safety first investor cares about downside risk and recognizes the heavy tail feature of the asset return distributions. Then we show that optimal portfolio sizes are smaller than traditional correlation based diversification analysis suggests. * We would like to thank Jay M. Chung for introducing us to the paper by Statman (1987).

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“…The second approach pioneered by Statman (1987Statman ( , 2004) takes a more practical view of the issue and seeks to find the number of securities beyond which the benefits of diversification are lower than the holding costs from an increased number of securities. This approach converts the risk of a simulated portfolio of n securities into a comparable return figure by combining the simulated portfolio with a risk-free asset to generate portfolio combinations with the same level of risk.…”

Section: Traditional Approaches To Testing the Benefits Of Diversificmentioning

confidence: 99%

The Attenuation of Idiosyncratic Risk under Alternative Portfolio Weighting Strategies: Recent Evidence from the UK Equity Market

Daryl¹,

Shawn²

2012

IJEF

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In this study, we investigate the attenuation of idiosyncratic risk and corresponding benefits of diversification for equally weighted and market capitalisation weighted portfolios in the UK Equity Market over 2002 -2012. We analyse the absolute benefits of risk reduction by testing the homogeneity of variances of portfolios of different sizes using Levene's Test. Next, we perform a cost-benefit analysis to determine the return benefit of diversification from a practical perspective. We find that the absolute benefits of diversification for an equally weighted portfolio are greater in the 'crisis' than 'pre-crisis' period, but when we analyse the results from a practical perspective the benefits fall dramatically and the results are reversed. When comparing the benefits of market capitalisation weighted and equally weighted portfolios, we note that the benefits of diversification tend to be greater for an equally weighted portfolio for small portfolios but that a crossover occurs as the size of the portfolio increases. The relative benefits of diversification under these different weighting strategies are thus highly dependent upon the state of the market and further study is needed to determine why the diversification benefits for the alternative weighting strategies decay at varying rates.

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The Diversification Puzzle

Cited by 146 publications

References 12 publications

Theories of Risk: Testing Investor Behaviour on the Taiwan Stock and Stock Index Futures Markets

Theories of Risk: Testing Investor Behaviour on the Taiwan Stock and Stock Index Futures Markets

The Downside Risk of Heavy Tails Induces Low Diversification

The Attenuation of Idiosyncratic Risk under Alternative Portfolio Weighting Strategies: Recent Evidence from the UK Equity Market

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