Department of Economics
Do investors like to diversify? A study of Markowitz preferences
We study rankings of completely and partially diversified portfolios and also of specialized assets when investors follow so-called Markowitz preferences. It turns out that diversification strategies for Markowitz investors are more complex than in the case of risk-averse and risk-inclined investors, whose investment strategies have been extensively investigated in the literature. In particular, we observe that for Markowitz investors, preferences toward risk vary depending on their sensitivities toward gains and losses. For example, it turns out that, unlike in the case of risk-averse and risk-inclined investors, Markowitz investors might prefer investing their entire wealth in just one asset. This finding helps us to better understand some financial anomalies and puzzles, such as the well known diversification puzzle, which notes that some investors tend to concentrate on investing in only a few assets instead of choosing the seemingly more attractive complete diversification. © 2011 Elsevier B.V. All rights reserved.
Diversified portfolio, Markowitz preferences, Portfolio selection, Risk aversion, Utility theory
Source Publication Title
European Journal of Operational Research
Egozcue, Martín, Luis Fuentes García, Wing-Keung Wong, and Ričardas Zitikis. "Do investors like to diversify? A study of Markowitz preferences." European Journal of Operational Research 215.1 (2011): 188-193.