RT Journal Article
SR Electronic
T1 The Paradox of Diversification
JF The Journal of Investing
FD Institutional Investor Journals
SP 32
OP 35
DO 10.3905/JOI.2010.19.1.032
VO 19
IS 1
A1 Michael Stutzer
YR 2010
UL https://pm-research.com/content/19/1/32.abstract
AB The current market malaise may keep some investors on the sidelines. The benefits of diversification may not seem as appealing in situations where the constituent investments are likely to lose money. Yet, using relatively simple math, the author shows that diversification maintained by rebalancing can easily turn individual assets’ negative cumulative returns into positive portfolio cumulative returns. This seemingly paradoxical result is the investing analog of a well-known phenomenon studied by physicists and mathematicians called Parrondo’s Paradox.TOPICS: Portfolio management/multi-asset allocation, exchanges/markets/clearinghouses, statistical methods