Niguez, Trino-Manuel and Paya, Ivan and Peel, David and Perote, Javier (2013) Higher-order moments in the theory of diversification and portfolio composition. Working Paper. Lancaster University, Department of Economics, Lancaster.
Abstract
This paper revisits the corner solution in classical portfolio choice theory in which risk-averse agents would all be optimally plungers rather than diversifiers. We examine the effect of higher-order moments of two-, three- and four-parameter density functions on the investor's decision to diversify in an expected utility framework. The empirical analysis provides estimates of four parametric and two semi-nonparametric densities for the S&P500 and concluded that allocation of all wealth in the risky asset would not have been optimal.