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On Diversification Given Asymmetry in Returns
Author(s) -
CONINE THOMAS E.,
TAMARKIN MAURRY J.
Publication year - 1981
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1981.tb01081.x
Subject(s) - diversification (marketing strategy) , homogeneous , skewness , economics , financial economics , preference , capital market , investment (military) , econometrics , microeconomics , business , finance , mathematics , combinatorics , marketing , politics , political science , law
Complete diversification is the rational investment strategy for a risk averse individual in a homogeneous securities market who considers only the first two moments of return. Observed behavior of market participants, however, demonstrates that the majority of individual investors hold imperfectly diversified portfolios. The purpose of the present study is to examine one potential cause for this behavior which does not rely on imperfection in the capital market. Specifically, we show that given the existence of, and investor preference for, positive skewness, a rational investor may hold an optimal limited number of homogeneous risk assets.