Abstract
This study analyzed the statement “diversification is a free lunch”. We empirically showed that diversification is only a free lunch under uncertainty or ignorance, confirming Warren Buffett’s “diversification is protection against ignorance”. Using historical returns of the S&P500 constituents illustrated that diversification not only decreased the risk but also the returns if the expected returns could be estimated. The findings of this study highlight that diversification reduces risk but that the risk reduction is not for free.
| Original language | English |
|---|---|
| Article number | 225 |
| Number of pages | 13 |
| Journal | Journal of risk and financial management |
| Volume | 17 |
| Issue number | 6 |
| DOIs | |
| Publication status | Published - Jun 2024 |