Idiosyncratic Risk and the Pricing of Poorly-Diversified Portfolios

This paper examines the role of idiosyncratic risk in explaining the cross-sectional variation of stock returns in the context of a set of size- and valuesorted portfolios.

Author(s) :

Chris Brooks

University of Reading, Whiteknights

Xiafei Li

Nottingham University Business School

Joelle Miffre

EDHEC Business School

Presentation :

A vast body of literature has documented the value premium and the small firm effect as pervasive stylized facts in empirical asset pricing and yet research has been largely unable to provide entirely convincing explanations of these phenomena. This paper examines the role of idiosyncratic risk in explaining the cross-sectional variation of stock returns in the context of a set of size- and valuesorted portfolios. We show that the risk premium for bearing idiosyncratic risk varies inversely with the number of stocks in the portfolio, and for the worst diversified portfolios, remains statistically significant within multifactor models based on either macroeconomic or size and value factors. Our findings thus indicate conclusively that investors demand an additional return for bearing the idiosyncratic risk of poorly-diversified portfolios.
Pdf
Idiosyncratic Risk and the Pricing of Poorly-Diversified Portfolios...
(19.00 B)
Type : Working paper
Date : le 29/06/2011
Extra information : For more information, please contact Joanne Finlay, EDHEC Research and Development Department [ joanne.finlay@edhec.edu ] The contents of this paper do not necessarily reflect the opinions of EDHEC Business School.
Research Cluster : Finance

See Also

Innovation with limited resources (Video)
- 18-08-2017
The article "Innovation with Limited Resources: Management Lessons from the German...
EDHEC consolidates its position as a world-leading school for business and entrepreneurship
- 03-07-2017
Founded by entrepreneurs, EDHEC has embraced the fundamental values of business for...
Station F successfully inaugurated in the presence of Emmanuel Macron and EDHEC
- 29-06-2017
EDHEC announced this May that it had joined Station F, the world’s biggest start-up...
- 22-06-2017
Peter Daly and Dennis Davy, professors at EDHEC Business School specialised in Language...