The Effect of the GFC (and Other Busts) on Portfolio Diversification Benefits

Abstract

The paper examines the extent of impairment of asset diversification benefits during share market crashes with particular focus on the effects of the GFC. The analysis uses return data on ASX Twenty Leaders’ stocks, from 1985 to 2009, to quantify the effect on diversification benefits of changing market conditions. In particular, the study focuses on the role that changing stock return volatility and changing stock pair-wise return correlations have on the risk characteristics of the minimum variance portfolio.