2016/08/17 by Gilles Boevi Koumou, Koumou, Gilles Boevi
Decision Sciences · Economics, Econometrics and Finance · #FOS: Economics and business #Financial Markets and Investment Strategies #Market Dynamics and Volatility #Portfolio Management (q-fin.PM) #Risk Management (q-fin.RM) #Risk and Portfolio Optimization
paper · pdf · doi:10.48550/arxiv.1608.05024
openalex publication_date 2016/08/17 · openalex created_date 2022/10/01 · openalex updated_date 2026/07/28
The conventional wisdom of mean-variance (MV) portfolio theory asserts that\nthe nature of the relationship between risk and diversification is a decreasing\nasymptotic function, with the asymptote approximating the level of portfolio\nsystematic risk or undiversifiable risk. This literature assumes that investors\nhold an equally-weighted or a MV portfolio and quantify portfolio\ndiversification using portfolio size. However, the equally-weighted portfolio\nand portfolio size are MV optimal if and only if asset returns distribution is\nexchangeable or investors have no useful information about asset expected\nreturn and risk. Moreover, the whole of literature, absolutely all of it,\nfocuses only on risky assets, ignoring the role of the risk free asset in the\nefficient diversification. Therefore, it becomes interesting and important to\nanswer this question: how valid is this conventional wisdom when investors have\nfull information about asset expected return and risk and asset returns\ndistribution is not exchangeable in both the case where the risk free rate is\navailable or not? Unfortunately, this question have never been addressed in the\ncurrent literature. This paper fills the gap.\n