Diversification Management of a Multi-Asset Portfolio

17 Pages Posted: 18 Mar 2014

See all articles by Christoph Kind

Christoph Kind

affiliation not provided to SSRN

Muddit Poonia

Indian Institute of Technology Kharagpur

Date Written: March 17, 2014

Abstract

It is a well-known fact in finance that classical mean-variance optimization often leads to highly concentrated portfolios. Giving equal weights to all portfolio assets will instead allow for maximum nominal diversification. More sophisticated ways of nominal diversification are the maximum diversification approach proposed by Choueifaty and Coignard (2008) or the equal weighting of total risk contributions known as "risk parity". Instead of looking for nominal diversification, investors may prefer a diversification of the risk factors that drive portfolio returns. In recent papers, risk factors have been modelled by principal components following Partovi and Caputo (2004). Meucci et al. (2013) show that principal components may not be the best way to model risk factors and propose "minimum torsion bets" instead. The present paper discusses different ways of managing diversification and backtests these strategies in a multi-asset portfolio.

Keywords: asset allocation; portfolio optimization; risk

JEL Classification: G11

Suggested Citation

Kind, Christoph and Poonia, Muddit, Diversification Management of a Multi-Asset Portfolio (March 17, 2014). Available at SSRN: https://ssrn.com/abstract=2410153 or http://dx.doi.org/10.2139/ssrn.2410153

Christoph Kind (Contact Author)

affiliation not provided to SSRN

Muddit Poonia

Indian Institute of Technology Kharagpur ( email )

Kharagpur
IIT Khragpur
Kharagpur, IN West Bengal 721302
India

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