solvency requirements
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2014 ◽  
Vol 49 (2) ◽  
pp. 409-430 ◽  
Author(s):  
Hong Liu

AbstractContrary to the prediction of the standard portfolio diversification theory, many investors place a large fraction of their stock investment in a small number of stocks. I show that underdiversification may be caused by solvency requirements. My model predicts that for quite general preferences and return distributions: (1) underdiversification decreases in discretionary wealth; and (2) expected return and covariance determine which stocks to invest in, but variance, higher moments, and Sharpe ratio do not matter for this choice. In addition, a less-diversified stock portfolio has a higher expected return, a higher volatility, and a higher skewness, and idiosyncratic risks are priced.


2011 ◽  
Vol 1 (S2) ◽  
pp. 185-197
Author(s):  
Ljudmila Bertschi ◽  
Julien Roueche ◽  
Nathalie Munaretto

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