Diversification in Lottery-Like Features and Portfolio Pricing Discounts*
نویسنده
چکیده
Why is a portfolio sometimes valued less than the sum of its underlying components? In this paper, I provide a novel explanation for this question by utilizing closed-end funds, mergers and acquisitions, and conglomerates, where the value of the aggregate portfolio and the values of the underlying components can be separately evaluated. Inspired by the model of Barberis and Huang (2008), in which lottery-like stocks are overvalued due to probability weighting, I argue that a portfolio holding lottery-like stocks should be valued less than the total value of its components, because lottery-like features get diversified away when lottery-like stocks do not hit “jackpots” together. I present evidence supporting this argument and provide a novel and unifying explanation for the closed-end fund discount puzzle, the announcement-day returns of mergers and acquisitions, and the conglomerate discount.
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تاریخ انتشار 2017