Questions tagged [diversification]
The diversification tag has no usage guidance.
40
questions
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1answer
12 views
Do equity mutual funds typically have industry-level diversification constraints?
For instance, are there limits to how concentrated a portfolio in terms of industry allocation?
If so, where can I find such information about the constraints each fund has?
-4
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0answers
32 views
Should negatively correlated stocks avoided while trading on small intervals?
I understand that negatively correlated stocks can be useful for diversification of portfolio while investing. But can it any good for trading?
2
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1answer
115 views
Which portfolio is more “diversified”: the $\frac{1}{N}$, the MDP or the max decorrelation?
Equally-weighted portfolio: weights each asset the same $w_i = 1/N$
Maximum diversification portfolio: maximizes the ratio, $\frac{w' \sigma}{\sqrt{w' \Sigma w}}$
Maximum decorrelation portfolio: ...
2
votes
1answer
115 views
Non-linear correlation (co-dependence) and the efficient frontier
The graph below shows how the efficient frontier for 2 assets bends into a sharp bisection as correlation decreases from $1$ to $-1$, with $\rho=-1$ being the most diversified, and highly unattainable ...
1
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1answer
44 views
Why is standard error used to show diversification effect for unsystematic risk?
quite long text incoming, sorry for that: While reading a corporate finance textbook, i came across a section describing the effect of diversification as well as the systematic and unsystematic risk. ...
0
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2answers
288 views
How can beta be negative? [closed]
I've been reading about the security market line and the definition of beta as
$$\beta_i = \frac{Cov(R_i, R_m)}{Var(R_m)} $$
for any asset (doesn't have to be an efficient portfolio), and have read ...
1
vote
1answer
101 views
Total portfolio VaR greater than aggregated individual VaRs
I am facing something weird in a simulation.
I have calculated a portfolio VaR: 100\$.
Then I aggregated the VaR for individual position (loans) and obtain: 98\$.
I thought it was not possible for the ...
2
votes
1answer
67 views
Is there a sound logic for buying a portfolio of call options in the same ratio as you would buy the underlying shares?
Suppose I believe it would be profitable to build an investment portfolio by investing, say, USD 30,000 in stocks in the following ratio: 30% in shares of CompanyA, 30% in CompanyB and 40% in CompanyC....
3
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1answer
165 views
how to construct a diversified portfolio based on correlation
I have a porfolio of indexes and I built up a python model based on spearman correlation (I used a spearman and not a pearson because, after running some test on outliers and normality ...
1
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0answers
103 views
Can simple risk management outperform portfolio optimization like this, or is there most likely an error?
I am using a simulation approach to compare the performances achievable by simple risk management and portfolio optimization for portfolio selection. My problem is that my results indicate that simple ...
0
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0answers
29 views
Is time diversification effective?
If the returns are log-normal, how do I find the probability of negative returns, since log can only take positive values as an argument. Also, for time = more than 1 year, how do I find the ...
1
vote
2answers
88 views
Formula for underdiversification
I'm trying to develop a study which links a person's demographic and social characteristics to a tendency to under diversify their portfolio. So far I was accounting for risk aversion and just going ...
2
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1answer
92 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/...
3
votes
1answer
187 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
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0answers
119 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 ...
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0answers
241 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
405 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 ...
14
votes
2answers
4k 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
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1answer
140 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
197 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 ...
2
votes
1answer
82 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
39 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
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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
245 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 ...
1
vote
5answers
304 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
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1answer
40 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 ...
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1answer
140 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 $\...
3
votes
2answers
503 views
Why does it “say” portfolio diversification not suitable during market turmoil?
Currently I am trying to get a hold of MPT, asset allocation and related applications.
While reading a particular resource, it says diversification works best for "normal" financial markets and ...
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votes
1answer
1k views
Is there any open-source library, implementing “exchange” to be used for algorithms running on the same computer?
Question: Is there any open-source project/library, which can act as a "local exchange" for agents (algorithms), running on the same computer?
Clarification: by "local exchange" I mean, that the ...
0
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1answer
4k views
How to adjust local currency returns to US$/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 ...
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0answers
483 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 ...
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1answer
244 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 ...
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2answers
217 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
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3answers
417 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
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4answers
812 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
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1answer
3k 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. ...
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3answers
500 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 ...
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3answers
6k 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 ...
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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 ...
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204 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? ...
