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Numerous studies have suggested that more investors nowadays are incorporating skewness as a factor in the selection of equity portfolios and the composition of the optimal portfolio can be significantly affected by this factor. After comprehensive literature review on the debate of this topic and the methods in trying to incorporate skewness in portfolio optimization, the paper uses empirical data first on two-asset portfolios, then on multi-asset portfolios selected base on various criteria such as industry sectors, correlation coefficient, random pick etc., to test on the effect of skewness to the risk of the portfolio. From the experiment results generated by two-asset portfolios, we find that negative skewness is the weakest in risk reduction. Then using this discovery, the paper runs regressions on the portfolio skewness to the risk reduction of the portfolio and discovered the opposite result, that in the year of 2011 the two variables are actually negatively related. This means that the more positively skewed stocks are chosen in a portfolio, the smaller the portfolio risk is reduced.
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Sun, Ce, "Skewness on Equity Portfolio Selection: Evidence From the US Stock Market" (2013). Senior Projects Spring 2013. 164.
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