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Portfolio optimisation and diversification

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  • David King

    (Investment Risk Group, Schroder Investment Management)

Abstract

Portfolio optimisation can produce overly concentrated portfolios that both practitioners and clients may find difficult to accept. This paper shows, through adjustments to the objective function, how to alter levels of portfolio diversification using the same quadratic programming methodology used in the standard portfolio optimisation process. The ideas can be extended to target differential levels of diversification at multiple levels of asset categorisation and can thus be used in a variety of settings.

Suggested Citation

  • David King, 2007. "Portfolio optimisation and diversification," Journal of Asset Management, Palgrave Macmillan, vol. 8(5), pages 296-307, December.
    • Handle: RePEc:pal:assmgt:v:8:y:2007:i:5:d:10.1057_palgrave.jam.2250082
    DOI: 10.1057/palgrave.jam.2250082
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    References listed on IDEAS

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    1. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
    2. Bernd Scherer, 2006. "A note on the out-of-sample performance of resampled efficiency," Journal of Asset Management, Palgrave Macmillan, vol. 7(3), pages 170-178, September.
    3. Bernd Scherer, 2007. "Can robust portfolio optimisation help to build better portfolios?," Journal of Asset Management, Palgrave Macmillan, vol. 7(6), pages 374-387, March.
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    Cited by:

    1. L. Theron & G. van Vuuren, 2020. "Exploring the Behaviour of Actively Managed, Maximally Diversified Portfolios," Studies in Economics and Econometrics, Taylor & Francis Journals, vol. 44(2), pages 49-72, August.
    2. Zhuanxin Ding & R. Douglas Martin & Chaojun Yang, 2020. "Portfolio turnover when IC is time-varying," Journal of Asset Management, Palgrave Macmillan, vol. 21(7), pages 609-622, December.

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