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Equity portfolio diversification with high frequency data
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2013-19_Alexeev...pdf | Download (1MB) Available under University of Tasmania Standard License. |
Abstract
Investors wishing to achieve a particular level of diversification may be misled on how many stocks to hold in a portfolio by assessing the portfolio risk at different data frequencies. High frequency intradaily data provide better estimates of volatility, which translate to more
accurate assessment of portfolio risk. Using 5-minute, daily and weekly data on S&P500 constituents for the period from 2003 to 2011 we find that for an average investor wishing to diversify away 85% (90%) of the risk, equally weighted portfolios of 7 (10) stocks will suffice,
irrespective of the data frequency used or the time period considered. However, to assure investors of a desired level of diversification 90% of the time, instead of on average, using low frequency data results in an exaggerated number of stocks in a portfolio when compared with the recommendation based on 5-minute data. This difference is magnified during periods when financial markets are in distress, as much as doubling during the 2007-2009 financial
crisis.
Item Type: | Report (Discussion Paper) |
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Authors/Creators: | Alexeev, V and Dungey, M |
Keywords: | repec, Portfolio diversification, high frequency, realized variance, realized correlation |
Publisher: | University of Tasmania |
Additional Information: | Discussion paper series N 2013-19. Copyright 2013 University of Tasmania |
Item Statistics: | View statistics for this item |
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