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Keynes Meets Markowitz: The Trade-off Between Familiarity and Diversification

This paper develops a model of portfolio choice that nests the views of Keynes—who advocates concentration in a few familiar assets—and Markowitz—who advocates diversification across assets. It relies on the concepts of ambiguity and ambiguity aversion to formalize the idea of an investor's "familiarity" toward assets....
Author(s)
Phelim Boyle, Lorenzo Garlappi, Raman Uppal, Tan Wang

This paper develops a model of portfolio choice that nests the views of Keynes—who advocates concentration in a few familiar assets—and Markowitz—who advocates diversification across assets. It relies on the concepts of ambiguity and ambiguity aversion to formalize the idea of an investor's "familiarity" toward assets.

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