Author/s: P Tasca
Source/Publisher: ETH Zurich, Chair of Systems Design Working Papers
Publication date: 2013
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This paper provides a mapping from portfolio risk diversification into the pairwise correlation between portfolios. In a finite market of uncorrelated assets, portfolio risk is reduced by increasing diversification. However, higher the diversification level, the greater is the overlap between portfolios. The overlap, in turn, leads to greater correlation between portfolios.
Picture Upper-bound of the correlation between two portfolios Pi and Pj with respect to their specific level of diversification. Market size N=1000.