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International Portfolio Diversification and the Magnitude of the Market Timer's Penalty
Article first published online: 3 APR 2007
DOI: 10.1111/j.1467-646X.1995.tb00056.x
Issue
1467-646X/asset/cover.gif?v=1&s=60d57fed6463a3ff805ff34d5b92f53bb882be17 "Journal of International Financial Management & Accounting")
Journal of International Financial Management & Accounting
Volume 6, Issue 3, pages 193–204, December 1995
Additional Information
How to Cite
Butler, K. C., Domian, D. L. and Simonds, R. R. (1995), International Portfolio Diversification and the Magnitude of the Market Timer's Penalty. Journal of International Financial Management & Accounting, 6: 193–204. doi: 10.1111/j.1467-646X.1995.tb00056.x
Publication History
- Issue published online: 3 APR 2007
- Article first published online: 3 APR 2007
- Abstract
- References
- Cited By
Abstract
Market timers without timing skill suffer a penalty relative to buy-and-hold investors in the form of higher portfolio risk. With transactions costs, timers suffer lower expected returns as well. We derive the magnitude of this penalty for a timer randomly switching funds between two or more risky assets. Assuming costless trades, a U.S.-based timer randomly switching between U.S. and Japanese national stock funds can expect to face a 26.2% higher standard deviation than a comparable buy-and-hold investor at the same level of expected return. A timer randomly switching between a globally diversified equity portfolio and U.S. T-bills faces a 50.3% higher standard deviation of return than a comparable buy-and-hold investor.