Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/86412 
Year of Publication: 
2005
Series/Report no.: 
Tinbergen Institute Discussion Paper No. 05-008/2
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
Risk managers use portfolios to diversify away the unpriced risk of individual securities. In this article we compare the benefits of portfolio diversification for downside risk in case returns are normally distributed with the case of fat-tailed distributed returns. The downside risk of a security is decomposed into a part which is attributable to the market risk, an idiosyncratic part, and a second independent factor. We show that the fat-tailed-based downside risk, measured as value-at-risk (VaR), should decline more rapidly than the normal-based VaR. This result is confirmed empirically.
Subjects: 
Diversification
Value-at-Risk
Decomposition
JEL: 
G0
G1
C2
Document Type: 
Working Paper

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