This paper introduces a model-independent measure of aggregate idiosyncratic risk based on the mean-variance portfolio theory and the concept of gain from portfolio diversification. With the new approach, there is no need to estimate the covariance terms or the industry-level or firm-level beta...

This paper examines the intertemporal relation between downside risk and expected stock returns. Value at risk (VaR), expected shortfall, and tail risk are used as measures of downside risk to determine the existence and significance of a risk-return tradeoff. We find a positive and significant...

Many investors and institutions have a long-run investment perspective, hence the question of stocks versus bonds in the long-run is of central importance. Despite the great deal of research attention devoted to this issue, views remain conflicting. Indeed, neither stocks nor bonds dominate when...

Diversification across time means changing the asset allocation from one period to another. We show that diversification across time is inferior to a portfolio with the same average asset allocation, held constant over time: it leads to a lower geometric mean, implying that in the long-run it...

Value-at-Risk (VaR) has become a standard measure for risk management and regulation. In the case of a two-parameter distribution, a common method among practitioners is first to calculate the daily VaR and then to apply it to a longer investment horizon by using the Square Root Rule (SRR). We...

Value-at-Risk (VaR) has become a standard measure for risk management and regulation. In the case of a two-parameter distribution, a common method among practitioners is first to calculate the daily VaR and then to apply it to a longer investment horizon by using the Square Root Rule (SRR). We...

Value-at-Risk (VaR) has become a standard measure for risk management and regulation. In the case of a two-parameter distribution, a common method among practitioners is first to calculate the daily VaR and then to apply it to a longer investment horizon by using the Square Root Rule (SRR). We...

Over the last 15years, dramatically decreasing foreign investment costs have not reduced the home bias. We show that the home bias induced by a given cost is proportional to the factor ρ/(1−ρ), where ρ is the average correlation between markets. This factor is very sensitive to the...

Markowitz and Sharpe won the Nobel Prize in Economics more than a decade ago for the development of Mean-Variance analysis and the Capital Asset Pricing Model (CAPM). In the year2002, Kahneman won the Nobel Prize in Economics for the development of Prospect Theory....

Under the assumption of normally distributed returns, we analyzewhether the Cumulative Prospect Theory of Tversky and Kahneman (1992) is consistent with the Capital Asset Pricing Model. We find that in every financial market equilibrium the Security Market Line Theorem holds....