Description

Investors scarcely use mean-variance optimization when deciding on their actual portfolios. One of the main reasons they give is that efficient portfolios are systematically concentrated in a few assets. This article shows that such an allocation is achieved when portfolio risk and return are seen as infinitely accurate magnitudes. However, if the frontier is considered within some infinitesimal tolerance, as in a one-hundredth neighborhood, there are thousands of efficient portfolios and, indeed, many of them are well diversified.