Risk Aversion and Investment Decisions, Part III
Challenges to Implementation
Chapter 7 introduces important issues in portfolio construction. In particular, it considers the biases that may be introduced when the mean returns for the individual securities being considered for portfolio inclusion are estimated with error. The tendency for world stock markets to move in tandem during periods of large adverse economic events, and the consequent loss of the gains to diversification at critical periods, is discussed. The relative riskiness of stock market investing over the short and long run time horizons is also considered.
Keywords
modern portfolio theory; parameter uncertainty; cross-correlations; random walk model; predictive variance ...
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