Naive Diversification and Portfolio Risk-A Note

A number of authors have used the portfolio standard deviation to model the risk reduction advantages of naive diversification. Other authors have pointed out that when risk is modelled by the portfolio's variance the modelling process becomes much simpler and is computationally more efficient....

Full description

Saved in:
Bibliographic Details
Published inManagement science Vol. 32; no. 2; pp. 244 - 251
Main Authors Bird, Ron, Tippett, Mark
Format Journal Article
LanguageEnglish
Published Linthicum, MD Institute of Management Sciences 01.02.1986
Institute for Operations Research and the Management Sciences
Subjects
Applied sciences
Business risks
Diversification
Economic models
Estimation bias
Exact sciences and technology
Financial portfolios
Mathematical models
Operational research and scientific management
Operational research. Management science
Portfolio diversification
Portfolio performance
Portfolio theory
Ratios
Regression analysis
Risk
Security portfolios
Standard deviation
Statistical variance
Systematic risk
Theory
Decision theory
Portfolio theory
Online AccessGet full text

Cover

More Information
Summary:A number of authors have used the portfolio standard deviation to model the risk reduction advantages of naive diversification. Other authors have pointed out that when risk is modelled by the portfolio's variance the modelling process becomes much simpler and is computationally more efficient. In this note we derive an exact parametric relationship between portfolio standard deviation and size and thus highlight the dangers of using the standard deviation in conjunction with O.L.S. regression techniques to model the risk reduction advantages of naive diversification. It is then shown that past empirical studies which have used this methodology are deficient.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.32.2.244