PORTFOLIO DIVERSIFICATION: A PICTORIAL ANALYSIS OF THE UK STOCK MARKET

Using company returns extracted as monthly time series from the London Share Price Database, a series of graphs are produced to present a visual analysis of portfolio diversificaton from January 1955 to December 1984. The 3 types of graphs produced are isometric plots, contour plots, and line plots....

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Bibliographic Details
Published in:Journal of business finance & accounting 1992-01, Vol.19 (1), p.87-101
Main Authors: Poon, S., Taylor, S. J., Ward, C.W.R.
Format: Article
Language:English
Subjects:
Diversification
Mathematical models
Portfolio investments
Portfolio management
Portfolio selection
Rates of return
Risk
Securities markets
Stock exchange
Stock exchanges
Studies
Time series
United Kingdom
Volatility
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Summary:Using company returns extracted as monthly time series from the London Share Price Database, a series of graphs are produced to present a visual analysis of portfolio diversificaton from January 1955 to December 1984. The 3 types of graphs produced are isometric plots, contour plots, and line plots. In considering portfolio sizes from one to 100 securities, it is found that cross-sectional portfolio variances are approximately normally distributed when the portfolio size increases beyond 10. The diversification should be capable of improvement by selecting a combination of securities that has minimum variance and by extending the sample to include securities listed at other stock markets. The analysis also shows that the performance of the UK stock market is not constant over time. High volatility is observed in the 1970s. This finding casts some doubts on research that assumes constant volatility in cross-sectional time series regression.
ISSN:0306-686X
1468-5957
DOI:10.1111/j.1468-5957.1992.tb00611.x