Skewness on Equity Portfolio Selection: Evidence from the US Stock Market

Alex W.H. Chung and Rong Qi

This paper uses empirical test on simple portfolios with two stocks only, then extending to portfolios selected based on various criteria such as industry sectors, correlation coefficient, random pick etc., to test on the effect of skewness to the risk of the selected portfolio. From the experiment results generated by selected portfolios with two stocks only, we find that the portfolio with negative skewness is the weakest in risk reduction. Extending to random portfolio scheme, in US stock markets, we run regressions on the portfolio skewness to the risk reduction of the portfolio and discovered the opposite facts, the two variables are actually negatively related. The results indicate that the more positive skewed stocks are chosen in a portfolio, by controlling the industry sector and the size of the firm, the smaller the portfolio risk is reduced.

DOI : https://doi.org/10.21102/irbrp.2017.03.131.01