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Equity portfolio diversification with high frequency data


Alexeev, V and Dungey, M, Equity portfolio diversification with high frequency data, Quantitative Finance, 15, (7) pp. 1205-1215. ISSN 1469-7688 (2015) [Refereed Article]

Copyright Statement

Copyright 2014 Taylor & Francis

DOI: doi:10.1080/14697688.2014.973898


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 20072009 financial crisis.

Item Details

Item Type:Refereed Article
Keywords:portfolio diversification, high frequency, realized variance, realized correlation
Research Division:Commerce, Management, Tourism and Services
Research Group:Banking, finance and investment
Research Field:Investment and risk management
Objective Division:Commercial Services and Tourism
Objective Group:Financial services
Objective Field:Investment services (excl. superannuation)
UTAS Author:Alexeev, V (Dr Vitali Alexeev)
UTAS Author:Dungey, M (Professor Mardi Dungey)
ID Code:96836
Year Published:2015 (online first 2014)
Web of Science® Times Cited:9
Deposited By:TSBE
Deposited On:2014-11-24
Last Modified:2018-04-05

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