Questions tagged [diversification]
The diversification tag has no usage guidance.
28
questions
2
votes
1answer
64 views
Maximum Diversification Strategy without risk free asset
I am currently dealing with the Maximum Diversification Strategy and I am trying to understand the synthetic universe approach from Choueifaty et al.(https://www.tobam.fr/wp-content/uploads/2014/12/...
1
vote
1answer
82 views
Which Maximum Diversification Approach in MATLAB is correct?
I am currently trying to find the portfolio weights of the Maximum Diversification Portfolio and found two approaches which result in different outcomes.
The first one is based on this paper:https://...
3
votes
0answers
86 views
Is Ledoit-Wolf Shrinkage with a Constant Correlation Prior Reasonable for a Stock/Bond Mix?
I've been looking into Ledoit-Wolf shrinkage but I've found the papers concentrate on large numbers of assets that tend to all be highly correlated. Often a universe of large cap stocks.
I'm ...
1
vote
0answers
173 views
Magnitude of the Diversification Ratio
How would I interpret the magnitude of the Diversification ratio? I know that the higher the number, the better, but is 1.1 massively different that 1.2?
For example a sharpe ratio of 0.25 is ...
4
votes
1answer
257 views
Portfolio Allocation given Sharpe Ratio
If there are two portfolios with sharpe ratios of 1.2 and 0.5, what would be the allocation rationale.
If the correlation between portfolios is:
$a. 0 $
$b. 0.8 $
$c.-0.8 $
I see there is a ...
10
votes
2answers
2k views
Intuitive Explanation for Shannon's Demon?
I am reading Fortune's Formula by William Poundstone, and I am puzzled by a phenomenon called "Shannon's Demon", which Claude Shannon allegedly proposed in a series of lectures, and preserved only by ...
0
votes
1answer
108 views
Is it better to express a currency position through multiple pairs?
I use a trend-following approach where I look for trends in various currency pairs such as GBP/USD or EUR/USD and then take a position in the Spot currency. I measure the performance of my strategy by ...
1
vote
0answers
164 views
Zero-beta assets and the Sharpe-Lintner CAPM
I'm reading The Capital Asset Pricing Model: Theory and Evidence (Fama and French, 2004) and came across the following statement:
"A risky asset’s return is uncorrelated with the market
return—its ...
1
vote
1answer
73 views
Decreasing dependence during the financial crisis?
In "Is the Potential for International Diversification Disappearing? A Dynamic
Copula Approach" by Christoffersen et al. (2012), the authors present the concept of Conditional Diversification Benefit ...
2
votes
0answers
37 views
$0$-beta stock and diversification
If we invest $w$ in the market portfolio and $1 - w$ in the risk-free asset, and observe a $0$-beta asset with expected return greater than the return on the risk-free asset, how can this be used in ...
1
vote
1answer
61 views
How to measure if investors are diversified in a stock market?
My question is related to this question but it is not the same.
Consider the US stock market. How can I tell if people trading in this market hold properly diversified portfolios?
Is there some ...
1
vote
2answers
196 views
Value-at-Risk “hiding risk in the tail” and diversification?
I have a question regarding Value-at-Risk and diversification?
When one says that VaR "hides the risk in the tail", does one mean that if we for instance look at VaR at level p=0.05 say, we might get ...
0
votes
5answers
242 views
What can I use to measure of diversification?
I have to come up with a measure of diversification for trade (this can tie in closely to diversification as regards portfolios).
Are there any well known measures of portfolio diversification?
2
votes
1answer
35 views
Can adding an uncorrelated high vol strategy to a low vol portfolio result in a portfolio with even lower volatility?
Let's say I have fund A with 20% annualized volatility and portfolio B with 15% annualized volatility. If A and B have 0 correlation, can the combination of these funds have volatility < 15% ? Are ...
1
vote
1answer
133 views
Risk minimization by investing in all assets with positive expected return
Suppose I have an amount $T$ to invest and $N$ available assets.
The stochastic return per invested unit of asset $i$ is $R_i$.
The variance and the expectation of $R_i$ are $\sigma^2_i$ and $\...
3
votes
2answers
488 views
Why does it “say” portfolio diversification not suitable during market turmoil?
Currently I am trying to get a hold of MPT, asset allocation and related applications.
While reading a particular resource, it says diversification works best for "normal" financial markets and ...
6
votes
1answer
1k views
Is there any open-source library, implementing “exchange” to be used for algorithms running on the same computer?
Question: Is there any open-source project/library, which can act as a "local exchange" for agents (algorithms), running on the same computer?
Clarification: by "local exchange" I mean, that the ...
0
votes
1answer
4k views
How to adjust local currency returns to US$/EUR return?
Iam doing research on return characteristics. As of today the scope of the research has changed from a local investor point of view to an international investor point of view. This basically means ...
1
vote
0answers
466 views
Call options portfolio: what would the underlyings' moments to be maximized?
Let you have only three underlyings, like SPY, TLT and GLD, and you want to buy $n_{1}$ Call options on SPY, $n_{2}$ Call options on TLT and $n_{3}$ Call options on GLD... with a limited budget, that ...
3
votes
1answer
161 views
Is this comment right about subadditivity?
I found this comment in a book I bought about risk management: Risk Management in Banking by Joel Bessis.
This is the well-known rule that states that the sum of individual
risks is less than the ...
9
votes
2answers
211 views
St Petersburg lottery pricing & short investing horizons
I am a statistician (no solid background in finance). Please forward me to a book \ chapter \ paper to resolve the following general question.
Suppose we have a stock with the following monthly return ...
8
votes
3answers
413 views
age-sensitive correlation measurements in finances
When it comes to comparing returns or prices of instruments like stocks/ETFs, are there any well-established formulas, or ones in common use, that place stronger emphasis on recent correlations more ...
4
votes
4answers
788 views
portfolio diversification tester
Are there any online tools (optionally with developer API, to spare me the scraping) that given an existing portfolio, calculate how well a new candidate position would score to increase combined ...
7
votes
1answer
2k views
How to simulate correlated assets for illustrating portfolio diversification?
I have seen multiple instances where people try to explain the diversification effects of having assets with a certain level of correlation, especially in the "most diversified portfolio" literature. ...
7
votes
3answers
477 views
Should the average investor hold commodities as part of a broadly diversified portfolio?
Many mutual funds sell "asset allocation" products which include appropriately sized investments in a variety of asset classes meant for a prototypical investor. Some of these, such as PIMCO, even ...
16
votes
3answers
5k views
How do I find the most diversified portfolio, or least correlated subset, of stocks?
I have a trading system that chooses top 10 stocks in Nasdaq 100 ranked on relative strength and some other factors. However, I'd like to take positions in only 5 of these 10 stocks based on how ...
16
votes
3answers
2k views
How does one analyze diversification if stock prices follow a Cauchy distribution?
How does diversification actually lead to less variance in a portfolio? I'm looking for a formal reason why this is the case. There are a number of explanations I have been able to find, but they make ...
5
votes
0answers
188 views
Benefits of Diversification and Rebalancing with negatively skewed leptokurtic return distribution?
I am missing tools to investigate this issue. I am trying to solve this question here. What kind of issues should you acknowledge over the naive diversification/rebalancing with normal distribution? ...
