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Thursday, October 8, 2020 | History

2 edition of Naive diversification and efficient portfolios found in the catalog.

Naive diversification and efficient portfolios

some tests and comparisons

by George M. Frankfurter

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  • 14 Currently reading

Published by College of Commerce and Business Administration, Bureau of Economic and Business Research, University of Illinois, Urbana-Champaign in [Urbana] .
Written in English


Edition Notes

Bibliography: p. 18-19.

StatementGeorge M. Frankfurter, Thomas Frecka
SeriesBEBR faculty working paper -- no. 804, BEBR faculty working paper -- no. 804.
ContributionsFrecka, Thomas J.
The Physical Object
Pagination19 p. ;
Number of Pages19
ID Numbers
Open LibraryOL24617194M
OCLC/WorldCa7954226

DeMiguel, V., Garlappi, L. and Uppal, R. () Optimal versus Naive Diversification How inefficient Is the 1/n Portfolio Strategy Review of Financial Studies, 22, Portfolio Analysis and Diversification Road Map • Capital allocation (single risky asset) • Capital allocation (multiple assets) • Portfolio diversification • Mean-variance principle • Efficient frontier and optimal portfolios • Passive portfolio management • Who is the generic investor?File Size: 1MB.

We model our investigation on a well-known paper by (DeMiguel, Garlappi, and Uppal ) titled “Optimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy?”, which discussed some of the major technical issues that complicate the use of portfolio optimization in practice. The authors also present the results of.   I find simply that naive diversification is hard to beat and perhaps naive investing isn’t so naive after all. I conduct a horse-race of the most recent innovations in portfolio optimization techniques using actual stock data, most similar to the study presented by Demiguel et al. ().

 Assignment No 6 Diversification in Stock Portfolios Introduction Diversification is one of the key components of a successful investment portfolio. Almost all experts advise the avoidance of concentrating all of your investments in one type. However, many investors forget about diversification once they see a financially attractive stock and concentrate all of their assets in it. Portfolio optimizaton. Now we combine the insights we gained from constructing the capital allocation line and the set of efficient portfolios using Markowitz’s portfolio selection approach. Combining both elements allows us to perform portfolio optimization to determine the optimal risky portfolio.. But let’s first recapitulate what we’ve learned so far.


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Naive diversification and efficient portfolios by George M. Frankfurter Download PDF EPUB FB2

(M-S)rtheterm"naiveportfolio"tode- scribe a strategy that,basedonthe normative implicationsofthe broadlyaccepted capitalassetpricing model [12, 17],callsforinvest.

Naive diversification A strategy whereby an investor simply invests in a number of different assets in the hope that the variance of the expected return on the portfolio is lowered.

In contrast, mathematical programming can be used to select the best possible investment weights. Related: Markowitz diversification.

Naive Diversification Diversification. In fact, a couple of investigations into optimization theory, such as "Optimal Versus Naive Diversification: How Efficient is the 1/N Portfolio Strategy," conducted by the London Business School's. Naive diversification. As we previously discussed – in the part on Markowitz portfolio selection – investors are able to construct portfolios with better return-risk profiles by combining a large number of securities.

This generally leads to a better performance than a single or small collection of securities can offer. Different studies suggest different minimum number of portfolio assets in order to benefit from the diversification effect.

For example Evans and Archer () suggest a portfolio size of   Naive diversification is a type of diversification strategy where an investor simply chooses different securities at random hoping that this will lower the risk of the portfolio due to the varied.

How efficient is naive portfolio diversification. an educational note. Author links open overlay panel Gordon Y.N. Tang a b. Show more. we have 45 (10 C 2) portfolios of size 2, (10 C 3) portfolios of size 3, etc. Taking all possible combinations of portfolios into consideration is the same as taking the expectation of by:   The results show that the Naive diversification and efficient portfolios book 1/N strategy is more likely to outperform the strategies from the optimizing models when: (i) N is large, because this improves the potential for diversification, even if it is naive, while at the same time increasing the number of parameters to be estimated by an optimizing model; (ii) the assets do not have a Cited by: In traditional portfolio management each stock in portfolio has equal weight (0,20) (Naive diversification).

In modern portfolio management, portfolios were created by mean-variance method, which.  Assignment No 6 Diversification in Stock Portfolios Introduction Diversification is one of the key components of a successful investment all experts advise the avoidance of concentrating all of your investments in one type.

However, many investors forget about diversification once they see a financially attractive stock and concentrate all of their assets in it. Betterment’s portfolio had significantly higher returns than the naive portfolio. While the Betterment portfolio did have a significantly larger drawdown in the financial crisis, previous gains meant that it was never worth less than the benchmark portfolios, even at the nadir of the financial crisis.

Although the importance of diversification in investment has long been recognized (see, e.g., Rubinstein, ), how to optimally allocate wealth across a universe of risky assets in a principled way remained elusive until the seminal work of Markowitz (, ), see also Roy ().The mean–variance efficient portfolios derived from such analysis are determined by the mean and Cited by: 8.

The efficient frontier represents that set of portfolios that has the maximum rate of return for every given level of risk. The last thing investors want is a portfolio with a low expected return.

Downloadable. The paper predicts an Efficient Market Property for the equity market, where stocks, when denominated in units of the growth optimal portfolio (GP), have zero instantaneous expected returns.

Well-diversified equity portfolios are shown to approximate the GP, which explains the well-documented good performance of equally weighted : Eckhard Platen, Renata Rendek. DeMiguel, Victor and Garlappi, Lorenzo and Uppal, Raman, Optimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy.

(May ). The Review of Financial Studies, Vol. 22, Issue 5, pp. Cited by: François-Serge Lhabitant, in Portfolio Diversification, Portfolio diversification with factor models.

Portfolio diversification in a factor-based world is more complex than that in an asset-based world, essentially because it may occur at three different levels: (i) the factor selection process; (ii) the construction of the factor-mimicking portfolios and (iii) the allocation to.

The Review of Financial Studies / v 22 n 5 lull in the literature on asset allocation, there have been considerable advances starting with the pathbreaking work of Markowitz (),2 who derived the optimal rule for allocating wealth across risky assets in a static setting when investors care only about the mean and variance of a portfolio’s return.

More than free essays. “Optimal Versus Naive Diversification: How Inefficient Is The 1/N Portfolio Strategy” – A Critique Title: The title of the paper “Optimal Versus Naive Diversification: How Inefficient Is The 1/N Portfolio Strategy” has been reasonably well phrased.

Figure 5: Growth of $1 for naive versus robust portfolio optimizations, 25 factor portfolios sorted on size and book-to-market, – Source: ReSolve Asset Management. Simulated results.

Portfolios formed quarterly based on trailing day returns for industries, factor. This monograph is concerned with the analysis of portfolios containing large numbers of securities.

Throughout we speak of “portfolio selection” rather than “security selection.” A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the.

Diversification is a prominent investment tenet known by average and sophisticated investors alike. Diversification means putting your proverbial eggs into more than one basket. The article constructs various diversified portfolios, where it applies naive diversification in a systematic way.

In a first study, it forms five indices with equally weighted constituents. The value of the equi-weighted index, EWId, having d constituents, d ∈{1, 10, 19, 41, }, is obtained by the following recursive formula:Cited by: However, for relatively large number of stocks in the portfolio, naive diversification maintains its superior performance but increases tail risk and results in more concave portfolio returns.

These results imply that the outperformance of naive diversification acts as compensation for the increase in Cited by: 3.