Portfolio Optimization with Respect to Risk Diversification

7 Pages Posted: 16 Nov 2008

Date Written: November 14, 2008


Traditional portfolio optimization approaches suffer from the drawback of often leading to highly concentrated portfolios. We propose a new kind of optimization focusing on a homogeneous distribution of risk among the portfolio constituents. We describe the underlying ideas of the approach and propose an easy to use and intuitive implementation using volatility or downside volatility as risk together with suitable homogeneity measures. The attractiveness of the approach lies in the fact, that it can be used in the presence of constraints and that it leads to better diversified portfolios without the need of manual adjustments. The diversifying effect is illustrated by some asset allocation examples.

Keywords: Portfolio optimization, Risk Diversification, Equal Risk Weighting, Entropy

JEL Classification: C10, C19, C60, C61

Suggested Citation

Neukirch, Thomas, Portfolio Optimization with Respect to Risk Diversification (November 14, 2008). Available at SSRN: https://ssrn.com/abstract=1301430 or http://dx.doi.org/10.2139/ssrn.1301430

Thomas Neukirch (Contact Author)

HQ Trust GmbH ( email )

Am Pilgerrain 17
Bad Homburg, 61352

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