Just noticed that some of NNT’s scholarly papers have been updated on the SSRN site. For example…
The Illusion of Thin-Tails Under Aggregation
Journal of Investment Management, Forthcoming
Taleb, Nassim Nicholas
Martin, George A.
Last Revised: 22 Apr 12It is assumed that while portfolio theory fails with daily returns, that it would work with yearly returns, an standard argument recently repeated in Treynor (2011). This paper debunks the confusion that daily returns, when non-Gaussian but with finite variance can aggregate to thin tails. Alas, portfolio theory fails in both the short and the long run. The central limit theorem operates too slowly for economic data for us to use it and take portfolio theory with any degree of seriousness. The point is illustrated with a Monte Carlo simulation.
Risk, Portfolio Theory, Treynor, Markowitz