Abstract Book of the 9th International Conference on Management, Economics and Finance
Year: 2025
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Diversification of Portfolio Risk
Nilanjana Chakraborty
ABSTRACT:
This paper explains that phenomena like volatility clustering and volatility persistence that violate the assumptions of Modern Portfolio Theory become irrelevant in face of mathematical flaws in its computation of portfolio mean return and portfolio variance of returns. Empirical validation of the explanation is provided by studying the returns and variances of seven classes of assets in the US over the last 25 years and it is found that diversification of risk in a portfolio is not dependent on correlations between constituent asset returns but rather on the mean returnvariance ratio of the return series of the portfolio itself.
Keywords: Modern Portfolio Theory, Mean Return, Variance, Risk, Diversification