Diversification in a Three-Moment World

Of the behavioral recommendations garnered from modern capital market theory, few, if any, generalizations have been documented as convincingly as the simple advice to hold several assets in one's portfolio. Sharpe made such a conclusion perfectly clear when he stated [27, p. 184]: If the market is efficient and if an investor is privy to no special information or predictive power, what should he do? First, and most important: diversify.