Investor preferences and portfolio selection: Is diversification an appropriate strategy?

C. James Hueng, Ruey Yau

Research output: Contribution to journalReview articlepeer-review

12 Scopus citations


This paper analyzes the relationship between diversification and several distributional characteristics that have risk implications for stock returns. We develop a flexible three-parameter distribution to model the stock returns. Using data on the current 30 DJIA stocks, we show that an investor's strategy on diversification depends on the measures of risk for particular concerns. For example, investors who desire to increase positive skewness would hold a less diversified portfolio, while those who care more about extreme losses would hold a more diversified portfolio. Experimenting with a more general pool of stocks yields the same conclusions.

Original languageEnglish
Pages (from-to)255-271
Number of pages17
JournalQuantitative Finance
Issue number3
StatePublished - Jun 2006


  • Asymmetric Generalized t distribution
  • Diversification
  • Skewness


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