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The Journal of Wealth Management

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Modern Portfolio Theory’s Third Rail: Achieving
Wealth Mobility Through Idiosyncratic Risk

Ashvin B. Chhabra, Ravindra Koneru and Lex Zaharoff
The Journal of Wealth Management Summer 2011, 14 (1) 66-72; DOI: https://doi.org/10.3905/jwm.2011.14.1.066
Ashvin B. Chhabra
is the chief investment officer at the Institute for Advanced Study in Princeton, NJ.
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  • For correspondence: achhabra@ias.edu
Ravindra Koneru
is the head of risk analytics at the Institute for Advanced Study in Princeton, NJ.
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  • For correspondence: rkoneru@ias.edu
Lex Zaharoff
is the president of LZ Investment Advisors in Weston, CT.
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  • For correspondence: Lexzaharoff@gmail.com
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Abstract

The goal of wealth generation demands a different investing strategy than the goal of wealth preservation. This article attempts to understand the impact of portfolio diversification on the ability of an investor to move up the wealth spectrum. While modern portfolio theory systematically eliminates idiosyncratic risk to create an optimal diversified portfolio, the authors’ conclusion is that upward wealth mobility is unlikely without the assumption of idiosyncratic risk. The authors use simple quantitative arguments to demonstrate that if an investment portfolio were limited to well-diversified portfolios lying along the efficient frontier, it would take close to a century to materially change the investor’s relative (wealth) position in society. A variety of data sources, including the Survey of Consumer Finances, the Forbes list of wealthiest individuals, and historical market returns are used to support those conclusions.

TOPICS: Portfolio theory, risk management

  • © 2011 Pageant Media Ltd
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The Journal of Wealth Management: 14 (1)
The Journal of Wealth Management
Vol. 14, Issue 1
Summer 2011
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Modern Portfolio Theory’s Third Rail: Achieving
Wealth Mobility Through Idiosyncratic Risk
Ashvin B. Chhabra, Ravindra Koneru, Lex Zaharoff
The Journal of Wealth Management Apr 2011, 14 (1) 66-72; DOI: 10.3905/jwm.2011.14.1.066

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Modern Portfolio Theory’s Third Rail: Achieving
Wealth Mobility Through Idiosyncratic Risk
Ashvin B. Chhabra, Ravindra Koneru, Lex Zaharoff
The Journal of Wealth Management Apr 2011, 14 (1) 66-72; DOI: 10.3905/jwm.2011.14.1.066
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  • Article
    • Abstract
    • THE WEALTH SPECTRUM OF AMERICA
    • HOW PEOPLE MOVE UP THE WEALTH SPECTRUM: LESSONS FROM THE FORBES 400
    • MARKOWITZ, MPT, LEVERAGE, AND IDIOSYNCRATIC RISK
    • WEALTH MOBILITY IS BIDIRECTIONAL
    • CONCLUSION
    • ENDNOTE
    • REFERENCES
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  • PDF (Subscribers Only)

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