Does Greater Diversification Really Improve Performance in Portfolio Selection?

15 Pages Posted: 30 Jul 2014

See all articles by Francesco Cesarone

Francesco Cesarone

Rome Tre University - Department of Business Studies

Jacopo Moretti

Faculty of Economis - Sapienza University of Rome

Fabio Tardella

Faculty of Economics - Sapienza University of Rome

Date Written: July 29, 2014

Abstract

One of the fundamental principles in portfolio selection models is minimization of risk through diversification of the investment. This seems to require that in a given working universe, or market, the investment should be spread among all (or almost all) the available assets. Indeed, this is what some classical investment strategies, like Equally-Weighted portfolios, or more recent and refined ones, like Risk Parity, actually recommend.

The purpose of this work consists in giving some empirical evidence of the fact that diversifying through the use of larger portfolios is not the best way to achieve an improvement in out-of-sample performance. More precisely, we investigate the role of the restriction on the number of assets in a portfolio (a cardinality constraint) on the in-sample and out-of-sample outcomes of the Equally-Weighted approach and of some well-known portfolio selection models that minimize risk through the use of Variance, Semi-Mean Absolute Deviation, and Conditional Value-at-Risk.

Our empirical analysis is based on some new and on some publicly available benchmark data sets often used in the literature.

Keywords: Asset Management, Diversification, Cardinality Constraints, Portfolio Optimization

JEL Classification: C6, G1

Suggested Citation

Cesarone, Francesco and Moretti, Jacopo and Tardella, Fabio, Does Greater Diversification Really Improve Performance in Portfolio Selection? (July 29, 2014). Available at SSRN: https://ssrn.com/abstract=2473630 or http://dx.doi.org/10.2139/ssrn.2473630

Francesco Cesarone (Contact Author)

Rome Tre University - Department of Business Studies ( email )

Via Silvio D'Amico 77
Via Silvio D'Amico 77
Rome, TN RM 00145
Italy

HOME PAGE: http://host.uniroma3.it/docenti/cesarone/papers.htm

Jacopo Moretti

Faculty of Economis - Sapienza University of Rome ( email )

Via del Castro Laurenziano 9
Via del Castro Laurenziano 9
Rome, RM 00161
Italy

Fabio Tardella

Faculty of Economics - Sapienza University of Rome ( email )

Via del Castro Laurenziano, 9
Roma, Rome 00161
Italy

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