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Article

Markowitz Versus the Talmudic Portfolio Diversification Strategies

Ran Duchin and Haim Levy
The Journal of Portfolio Management Winter 2009, 35 (2) 71-74; DOI: https://doi.org/10.3905/JPM.2009.35.2.071
Ran Duchin
is an assistant professor of finance at the Stephen M. Ross School of Business, University of Michigan, in Ann Arbor, MI.
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  • For correspondence: duchin@umich.edu
Haim Levy
is Miles Robinson professor of business administration at Hebrew University in Jerusalem, Israel.
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  • For correspondence: mshlevy@mscc.huji.ac.il
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Abstract

Although expected utility theory and the classical mean variance diversification theory of Markowitz assert that optimal diversification depends on the joint distribution of returns, investors tend to ignore these well-accepted theoretical approaches in favor of the naïve investment strategy promulgated in the Babylonian Talmud called the 1/3 rule (or the 1/n rule for n assets),which assigns an equal weight to each security in the portfolio. In testing the efficiency of the 1/n rule, the authors find that it outperforms the mean variance rule for individual small portfolios out of sample, but for large portfolios (i.e., institutional investors) the Markowitz strategy is superior. The advantage of the 1/n rule in the out-of-sample analysis is the absence of exposures to estimation errors.

  • © 2009 Institutional Investor, Inc.
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Markowitz Versus the Talmudic Portfolio Diversification Strategies
Ran Duchin, Haim Levy
The Journal of Portfolio Management Jan 2009, 35 (2) 71-74; DOI: 10.3905/JPM.2009.35.2.071

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Markowitz Versus the Talmudic Portfolio Diversification Strategies
Ran Duchin, Haim Levy
The Journal of Portfolio Management Jan 2009, 35 (2) 71-74; DOI: 10.3905/JPM.2009.35.2.071
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