Test of Portfolio Building Rules

Latané, Henry A.; Young, William E.

doi:10.1111/j.1540-6261.1969.tb00385.x

Cited by 39 publications

(7 citation statements)

References 18 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…This means, although the monthly nominal return of portfolios in the minimum diversification is higher than that of extensive diversification, the risk faced by such portfolios is much higher than the excess return given. This is in line with the findings of Dorn & Huberman (2010), Goetzmann &Kumar (2008), andLatane &Young (1969) that the performance of extensive diversification, if viewed in terms of mean-variance, is still better. The Clute Institute…”

Section: Risk-adjusted Returnsupporting

confidence: 89%

“…The Survey of Reserve Board in the United States in 1975 finds the same results that the average of stock holding among retail investors is 3.41. Lease, Lewellen, and Schlarbaum (1976), King &Leape (1998), andStarr-McCluer (1995) support the above findings that most retail investors (70%) do not diversify. Kelly (1995) confirms the same phenomenon of underdiversification that out of 632 stock investors, only 35 hold ten or more stocks, and only 11 have twenty or more stocks.…”

Section: Introductionmentioning

confidence: 84%

See 1 more Smart Citation

The Performance Of Undiversified Portfolio In Indonesia Stock Exchange

Frensidy¹

2016

JABR

View full text Add to dashboard Cite

This research is aimed to analyze the diversification practice among domestic retail investors at the Indonesia Stock Exchange (IDX) and its portfolio performance. An individual domestic investor at IDX holds 4.3 stocks on average with the median two stocks. This is far from the minimum number of stocks required for the diversification purpose. But, this finding is in line with the findings of Goetzmann & Kumar (2008), Kelly (1995), and Polkovnichenko (2005). For the performance, without considering risk, minimum diversification with five stocks or fewer and moderate diversification with six to ten stocks in the portfolios tend to be better than the extensive diversification. However, when risk is taken into account, the undiversified portfolios do not outperform the extensive diversification.

show abstract

Section: Risk-adjusted Returnsupporting

confidence: 89%

Section: Introductionmentioning

confidence: 84%

The Performance Of Undiversified Portfolio In Indonesia Stock Exchange

Frensidy¹

2016

JABR

View full text Add to dashboard Cite

show abstract

“…See [16] for computational details. The entire analysis was repeated assuming monthly reallocation with substantially identical results.…”

mentioning

confidence: 99%

Investment Performance of Common Stocks in Relation to Their Price‐earnings Ratios: A Test of the Efficient Market Hypothesis

Basu¹

1977

The Journal of Finance

1,812

830

View full text Add to dashboard Cite

I. INTRODUCTIONIN AN EFFICIENT CAPITAL MARKET, security prices fully reflect available information in a rapid and unbiased fashion and thus provide unbiased estimates of the underlying values. While there is substantial empirical evidence supporting the efficient market hypothesis,' many still question its validity. One such group believes that price-earnings (P/E) ratios are indicators of the future investment performance of a security. Proponents of this price-ratio hypothesis claim that low P/E securities will tend to outperform high P/E stocks.2 In short, prices of securities are biased, and the P/E ratio is an indicator of this bias.3 A finding that returns on stocks with low P/E ratios tends to be larger than warranted by the underlying risks, even after adjusting for any additional search and transactions costs, and differential taxes, would be inconsistent with the efficient market hypothesis.4 particularly to this Journal's referees, Nancy L. Jacob and Marshall E. Blume, for their very helpful comments and suggestions. Of course, any remaining errors are the author's responsibility. Research support from the Graduate School of Business and Public Administration, Cornell University is gratefully acknowledged.1. See Fama [8] for an extensive discussion of the efficient market hypothesis and a synthesis of much of the empirical evidence on this issue.2. See Williamson [28; p. 1621. Smidt [27] argues that one potential source of market inefficiency is inappropriate market responses to information. Inappropriate responses to information implicit in P/E ratios are believed to be caused by exaggerated investor expectations regarding growth in earnings and dividends; i.e., exaggerated optimism leads, on average, to high P/E securities and exaggerated pessimism leads, on average, to stocks with low P/E ratios. For an elaboration on this point see [19; p. 28], [20], [21] and [28; p. 161-1621. A contrary position is discussed in [22]. 4. In general, results of previous empirical research by Breen [5], Breen & Savage [6], McWilliams [18], Miller & Widmann [19] and Nicholson[20] seem to support the price-ratio hypothesis. While this may suggest a violation of the semi-strong form of the efficient market hypothesis, all of these studies have one or more of the following limitations: (i) retroactive selection bias, (ii) no adjustment for risk, marginal information processing and transactions costs, and differential tax effects pertaining to capital gains and dividends, and (iii) earnings information is assumed to be available on or before the reporting date. 664The Journal of Finance II. DATA AND METHODOLOGYThe following general research design was employed to examine the relationship between P/E ratios and investment performance of equity securities. For any given period under consideration, two or more portfolios consisting of securities with similar P/E ratios are formed. The risk-return relationships of these portfolios are compared and their performance is then evaluated in terms of pre-specified measures. Finally...

show abstract

“…Evans and Archer (1968) used a large‐scale simulation to compare the standard deviation of portfolio returns to the size of the portfolios; they concluded that most of the risk reduction could be achieved by diversifying over a relatively small number of securities. Their results were supported in additional simulation studies by Latane and Young (1969), Fisher and Lorie (1968), and Mokkelbost (1971). The impact of even small departures from perfect diversification have been studied by Lorie (1975), Upson, Jessup, and Matsumoto (1975), and Elton and Gruber (1977).…”

Section: Previous Security Diversification Studiesmentioning

confidence: 54%

Simulation of Portfolio Returns: Varying Numbers of Securities and Holding Periods

Lloyd

Goldstein

1982

J of Financial Research

View full text Add to dashboard Cite

Variability may be measured around the long-run market return by combining the welldeveloped area of security diversification with the notion of time diversification. This nontraditional concept of diversifiable risk is illustrated with results of a very large scale simulation. The results are very general since the data used in the simulation consist of all firms on the Center for Research in Security Prices (CRSP) monthly return file from January 1926 through December 1977. 28The Journal ofFinancial Research diversification and diversifiable risk. We use the long-run market rate of return as a proxy for the investor's expected rate of return. Risk is the possibility of a portfolio return being different from what was expected. Deviations away from this long-run market return could occur because the securities held in the portfolio were not representative of the market (lack of security diversification) or because the time period the portfolio is held is not representative of the long-run market performance (lack of time diversification). This dual diversification concept was recently developed by Lloyd and Haney (1980), although some of the concepts were explored by Tobin (1965) much earlier. This paper will empirically explore the effects of both kinds of diversification, their relative importance, and the possibility of trading off one kind of diversification for another.

show abstract

Test of Portfolio Building Rules

Cited by 39 publications

References 18 publications

The Performance Of Undiversified Portfolio In Indonesia Stock Exchange

The Performance Of Undiversified Portfolio In Indonesia Stock Exchange

Investment Performance of Common Stocks in Relation to Their Price‐earnings Ratios: A Test of the Efficient Market Hypothesis

Simulation of Portfolio Returns: Varying Numbers of Securities and Holding Periods

Contact Info

Product

Resources

About