Portfolio Optimization and the Distribution of Firm Size
30 Pages Posted: 16 Jun 2008
Date Written: June 2008
Abstract
The empirical distribution of firms' market capitalizations is shown to be in excellent agreement with a very skewed lognormal distribution: the largest firms are about 1000 times larger than the median firm. Can this skewed size distribution be consistent with mean-variance portfolio optimization and realistic return parameters? We show that the expected returns implied by the empirical size distribution and portfolio optimization agree with the empirical average returns. Moreover, the portfolio optimization framework can provide a constructive explanation for the observed lognormal distribution. Thus, portfolio optimization is not only consistent with the empirical size distribution, it can actually explain it.
Keywords: firm size, portfolio optimization, mean-variance analysis, lognormal distribution, Gibrat process, CAPM
JEL Classification: G11, L11, G3
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
On the Evolution of the Firm Size Distribution: Facts and Theory
By Luis M. B. Cabral and José Mata
-
The Information Technology Revolution and the Stock Market: Evidence
By Bart Hobijn and Boyan Jovanovic
-
Aggregate Consequences of Limited Contract Enforceability
By Thomas F. Cooley, Ramon Marimon, ...
-
Aggregate Consequences of Limited Contract Enforceability
By Thomas F. Cooley, Ramon Marimon, ...
-
Aggregate Consequences of Limited Contract Enforceability
By Thomas F. Cooley, Vincenzo Quadrini, ...
-
The it Revolution and the Stock Market
By Jeremy Greenwood and Boyan Jovanovic
-
The it Revolution and the Stock Market
By Jeremy Greenwood and Boyan Jovanovic