Questions tagged [diversification]

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109 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: ...
111 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 ...
41 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. ...
226 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 ...
100 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 ...
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....
137 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 ...
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 ...
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 ...
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 ...
89 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/...
181 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://...
115 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 ...
240 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 ...
390 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 ...
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 ...
137 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 ...
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 assetās return is uncorrelated with the market returnāits ...
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 ...
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 ...
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 ...
243 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 ...
297 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?
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 ...
140 views

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 $\... 2answers 502 views Why does it “say” portfolio diversification not suitable during market turmoil? Currently I am trying to get a hold of MPT, asset allocation and related applications. While reading a particular resource, it says diversification works best for "normal" financial markets and ... 1answer 1k views Is there any open-source library, implementing “exchange” to be used for algorithms running on the same computer? Question: Is there any open-source project/library, which can act as a "local exchange" for agents (algorithms), running on the same computer? Clarification: by "local exchange" I mean, that the ... 1answer 4k views How to adjust local currency returns to US$/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 ...
482 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 ...
235 views

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 ...
216 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 ...
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 ...
810 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 ...
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. ...
498 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 ...
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 ...