RT Journal Article
SR Electronic
T1 Modern Portfolio Theory’s Third Rail: Achieving
Wealth Mobility Through Idiosyncratic Risk
JF The Journal of Wealth Management
FD Institutional Investor Journals
SP 66
OP 72
DO 10.3905/jwm.2011.14.1.066
VO 14
IS 1
A1 Ashvin B. Chhabra
A1 Ravindra Koneru
A1 Lex Zaharoff
YR 2011
UL https://pm-research.com/content/14/1/66.abstract
AB The goal of wealth generation demands a different investing strategy than the goal of wealth preservation. This article attempts to understand the impact of portfolio diversification on the ability of an investor to move up the wealth spectrum. While modern portfolio theory systematically eliminates idiosyncratic risk to create an optimal diversified portfolio, the authors’ conclusion is that upward wealth mobility is unlikely without the assumption of idiosyncratic risk. The authors use simple quantitative arguments to demonstrate that if an investment portfolio were limited to well-diversified portfolios lying along the efficient frontier, it would take close to a century to materially change the investor’s relative (wealth) position in society. A variety of data sources, including the Survey of Consumer Finances, the Forbes list of wealthiest individuals, and historical market returns are used to support those conclusions.TOPICS: Portfolio theory, risk management