PORTFOLIO DIVERSIFICATION

James A. Bennett and Richard W. Sias

Contrary to conventional wisdom, there is no evidence investors can, or have ever been able to, easily form portfolios containing negligible exposure to unsystematic returns. Because well-diversified portfolios are the bedrock upon which so much financial theory is built, investors’ inability to easily form well-diversified portfolios helps explain the persistence of anomalies and the possibility of “bubbles” in asset prices.