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Equity portfolio diversification with high frequency data

journal contribution
posted on 2023-05-18, 05:21 authored by Alexeev, V, Dungey, M
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-min, 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 (in contrast to on average), using low frequency data results in an exaggerated number of stocks in a portfolio when compared with the recommendation based on 5-min data. This difference is magnified during periods when financial markets are in distress, as much as doubling during the 2007–2009 financial crisis.

History

Publication title

Quantitative Finance

Volume

15

Issue

7

Pagination

1205-1215

ISSN

1469-7688

Department/School

TSBE

Publisher

Routledge

Place of publication

United Kingdom

Rights statement

Copyright 2014 Taylor & Francis

Repository Status

  • Restricted

Socio-economic Objectives

Investment services (excl. superannuation)

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