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Specific Risk for Long-Term Horizons
Jan 1, 2010
We discuss the extra risk associated with undiversified portfolios, build a model for simulating an undiversified portfolio over a very long time horizon, and test the model empirically. The model incorporates both credit and market risk. The main result is that, for any portfolio, the excess volatility ascribed to underdiversification is proportional, on average, to the Herfindahl index of the portfolio.
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