Is More Always Better? Empirical Evidence on Optimal Portfolio Size

Melkumian, Alla A.; Melkumian, Arsen V.

doi:10.1057/palgrave.eej.9050045

Cited by 1 publication

(1 citation statement)

References 13 publications

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“…The model specifies that an equal amount is held in each stock. This is not efficient according to most portfolio choice models, but it is apparently descriptive of real-world practices among many if not most investors, as indicated in contributions by De Wit (1998), Cheng and Liang (2000), Benartzi and Thaler (2001), Stevenson (2001), Windcliff and Boyle (2004), McCatchey and Vandenhul (2005), Melkumian (2009), andDuchin andLevy (2009). Also, this specification is consistent with the model assumption that all stocks are alike.…”

Section: The Homogeneous Securities Modelsupporting

confidence: 53%

Opportunity Costs of Sub-Optimal Diversification

Yunker

Melkumian²

2012

AFR

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The practical relevance of the extensive theoretical literature on optimal diversification has been brought into question by a wide variety of research that suggests individual investors utilize investment principles that are distinctly sub-optimal relative to theoretical principles. If these indications are indeed legitimate, this might be owing to the irrationality of investors, or to imperfections in the theoretical models. The present research suggests a third possibility: that the numerical payoff to optimal diversification is relatively minor. On the basis of a numerically implemented and empirically supported model of optimal diversification developed by Yunker and Melkumian (2010), the present research finds that the numerical opportunity costs (welfare losses) from sub-optimal diversification are quite minor even for substantial departures from the optimal levels of the decision variables. The suggestion from the research is therefore that individual investors tend to "satisfice" rather than "maximize" or "optimize" in making their diversification decisions. Journal of Economic LiteratureClassifications: G11 (Portfolio Choice, Investment Decisions)

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