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Entropy, a term used in Physics to quantify the degree of randomness in a complex system, is shown to be relevant for portfolio diversification. The link between entropy and diversification lies in the notion of uncertainty. We introduce the concept of available diversification in an investment...
Long-term investors are attuned to the thought that risk is rewarded. By making an investment with more potential variation in returns, investors demand a risk premium – the expected return in excess of a comparatively risk-less investment. This is particularly espoused in the long-term...
Consumers’ expenditures reflect their information about employment opportunities, likely future real wage growth, and investment opportunities, as well as current wealth and income. Real, total consumption growth deviations from normal stock market wealth effects lead economic growth in advanced...
Financial theory assumes that higher risk is compensated on average by higher returns. However, the outperformance of low-volatility stocks during the last 50 years has been among the most puzzling anomalies in equity markets. At the same time, low-risk investing has recently gained a remarkable...
Doubts are rising whether bond indices, in the way they are constructed, are effective in their role of representing the markets they are designed for. Since index constituents are defined on market shares – the larger the debt obligation, the larger the share in the index – it may be that...
This article compares the performance of various diversification strategies regarding foreign exchange reserves. The aim is to provide central banks with guidelines in portfolio allocation. We pay particular attention to the situation of upward pressures on US interest rates by implementing our...
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