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A Note on Diversification

Published online by Cambridge University Press:  19 October 2009

Gordon Pye
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Extract

It is widely assumed in portfolio theory that investors are risk-averse expected-utility maximizers. There is a good theoretical reason for assuming expected-utility maximization. Such behavior is well known to be consistent with several quite plausible postulates of rationality [5]. On the other hand, the main empirical foundation for such behavior in portfolio selection appears to be the observation of diversification. Risk-averse, expected-utility maximization implies diversification in portfolio selection, and investors are observed to diversify.

Information

Type
Communications
Information
Journal of Financial and Quantitative Analysis , Volume 9 , Issue 1 , January 1974 , pp. 131 - 136
Copyright
Copyright © School of Business Administration, University of Washington 1974

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References

REFERENCES

[1]Bawa, V. “Minimax Policies for Selling a Non-divisible Asset.” Management Science: Theory, March 1973.CrossRefGoogle Scholar
[2]Pye, G. “Minimax Policies for Selling an Asset and Dollar Averaging.” Management Science: Theory, March 1971.CrossRefGoogle Scholar
[3]Pye, G. “Minimax Portfolio Policies.” Financial Analysts Journal, March–April 1972.CrossRefGoogle Scholar
[4]Samuelson, P. “General Proof that Diversification Pays.” Journal of Financial and Quantitative Analysis, September 1967.CrossRefGoogle Scholar
[5]Von Neuman, J., and Morgenstern, O.. Theory of Games and Economic Behavior. Princeton, N. J.: Princeton University Press, 1944.Google Scholar