Correlation Diversified Passive Portfolio Strategy Based on Permutation of Assets

14 Pages Posted: 3 Dec 2019 Last revised: 3 Feb 2021

See all articles by Yutaka Sakurai

Yutaka Sakurai

AI Finance Application Research Institute

Yusuke Yuki

NTT Data

Ryota Katsuki

NTT Data

Takashi Yazane

NTT Data

Fumio Ishizaki

AI Finance Application Research Institute; Modal Stage

Date Written: November 15, 2019

Abstract

In this paper, we develop a passive strategy improving index investing, which we call Correlation Diversified Portfolio strategy. The proposed method adjusts weight vector of original index based on the permutation of assets composing the original index. We seek the permutation of assets such that assets with strong correlation to many other assets should be placed in the central part of permutation. By reducing the weights of assets placed in the central part of permutation, we can construct portfolios which are more diversified and have better risk-return characteristics than original index. To examine the usefulness and computational feasibility of the proposed method, we apply it to three major indices of US and Japan, and we provide numerical experiments. The numerical experiments show that portfolios constructed by the proposed method can achieve higher return with lower volatility than the original indices, while their behaviors are still similar to those of the original indices.

Keywords: index investing, Correlation Diversified Portfolio (CDP), permutation, quantum-inspired approach.

JEL Classification: G11

Suggested Citation

Sakurai, Yutaka and Yuki, Yusuke and Katsuki, Ryota and Yazane, Takashi and Ishizaki, Fumio, Correlation Diversified Passive Portfolio Strategy Based on Permutation of Assets (November 15, 2019). Available at SSRN: https://ssrn.com/abstract=3487195 or http://dx.doi.org/10.2139/ssrn.3487195

Yutaka Sakurai

AI Finance Application Research Institute ( email )

2-2-8 Minamiaoyama
Minato, Tokyo 107-0062
Japan
+81-3-6434-0482 (Phone)

Yusuke Yuki

NTT Data ( email )

Japan

Ryota Katsuki

NTT Data ( email )

Japan

Takashi Yazane

NTT Data ( email )

Japan

Fumio Ishizaki (Contact Author)

AI Finance Application Research Institute ( email )

2-2-8 Minamiaoyama
Minato, Tokyo 107-0062
Japan

Modal Stage ( email )

4-7-6-704 Shiba
Minato, Tokyo 108-0014
Japan

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
263
Abstract Views
2,028
rank
143,454
PlumX Metrics