PT  - JOURNAL ARTICLE
AU  - David B Chua
AU  - Mark Kritzman
AU  - Sébastien Page
TI  - The Myth of Diversification
AID  - 10.3905/JPM.2009.36.1.026
DP  - 2009 Oct 31
TA  - The Journal of Portfolio Management
PG  - 26--35
VI  - 36
IP  - 1
4099  - https://pm-research.com/content/36/1/26.short
4100  - https://pm-research.com/content/36/1/26.full
AB  - Perhaps the most universally accepted precept of prudent investing is to diversify, yet this precept grossly oversimplifies the challenge of portfolio construction. Correlations, as typically measured over the full sample of returns, often belie an asset’s diversification properties in market environments when diversification is most needed. Moreover, upside diversification is undesirable. The authors first describe the mathematics of conditional correlations assuming returns are normally distributed. Then they present empirical results across a wide variety of assets, which reveal that, unlike the theoretical conditional correlations, empirical correlations are significantly asymmetric. Finally, the authors show that a portfolio construction technique called full-scale optimization produces portfolios in which the component assets exhibit relatively lower correlations on the downside and higher correlations on the upside than mean-variance optimization portfolios.TOPICS: Portfolio construction, quantitative methods, portfolio theory