dorsal/arxiv
View SchemaHow many independent bets are there?
| Authors | Daniel Polakow, Tim Gebbie |
|---|---|
| Categories | |
| ArXiv ID | physics/0601166 |
| URL | https://arxiv.org/abs/physics/0601166 |
| DOI | 10.1057/jam.2008.26 |
| Journal | J Asset Manag 9: 278-288 2008 |
Abstract
The benefits of portfolio diversification is a central tenet implicit to modern financial theory and practice. Linked to diversification is the notion of breadth. Breadth is correctly thought of as the number of in- dependent bets available to an investor. Conventionally applications us- ing breadth frequently assume only the number of separate bets. There may be a large discrepancy between these two interpretations. We uti- lize a simple singular-value decomposition (SVD) and the Keiser-Gutman stopping criterion to select the integer-valued effective dimensionality of the correlation matrix of returns. In an emerging market such as South African we document an estimated breadth that is considerably lower than anticipated. This lack of diversification may be because of market concentration, exposure to the global commodity cycle and local currency volatility. We discuss some practical extensions to a more statistically correct interpretation of market breadth, and its theoretical implications for both global and domestic investors.
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"abstract": "The benefits of portfolio diversification is a central tenet implicit to\nmodern financial theory and practice. Linked to diversification is the notion\nof breadth. Breadth is correctly thought of as the number of in- dependent bets\navailable to an investor. Conventionally applications us- ing breadth\nfrequently assume only the number of separate bets. There may be a large\ndiscrepancy between these two interpretations. We uti- lize a simple\nsingular-value decomposition (SVD) and the Keiser-Gutman stopping criterion to\nselect the integer-valued effective dimensionality of the correlation matrix of\nreturns. In an emerging market such as South African we document an estimated\nbreadth that is considerably lower than anticipated. This lack of\ndiversification may be because of market concentration, exposure to the global\ncommodity cycle and local currency volatility. We discuss some practical\nextensions to a more statistically correct interpretation of market breadth,\nand its theoretical implications for both global and domestic investors.",
"arxiv_id": "physics/0601166",
"authors": [
"Daniel Polakow",
"Tim Gebbie"
],
"categories": [
"physics.soc-ph",
"physics.data-an",
"q-fin.PM",
"q-fin.ST"
],
"doi": "10.1057/jam.2008.26",
"journal_ref": "J Asset Manag 9: 278-288 2008",
"title": "How many independent bets are there?",
"url": "https://arxiv.org/abs/physics/0601166"
},
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