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Risk, ambiguity, and the value of diversification

Abstract : Diversification is a basic economic principle that helps to hedge against uncertainty. It is therefore intuitive that both risk aversion and ambiguity aversion should positively affect the value of diversification. In this paper, we show that this intuition (1) is true for risk aversion but (2) is not necessarily true for ambiguity aversion. We derive sufficient conditions, showing that, contrary to the economic intuition, ambiguity and ambiguity aversion may actually reduce the diversification value.
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https://hal.archives-ouvertes.fr/hal-02910906
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Submitted on : Monday, August 3, 2020 - 11:51:49 AM
Last modification on : Wednesday, October 20, 2021 - 9:58:25 AM
Long-term archiving on: : Monday, November 30, 2020 - 1:34:23 PM

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Loïc Berger, Louis Eeckhoudt. Risk, ambiguity, and the value of diversification. Management Science, INFORMS, 2021, 67 (3), pp.1639-1647. ⟨10.1287/mnsc.2020.3823⟩. ⟨hal-02910906⟩

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