Improving portfolio diversification: Identifying the right baskets for putting your eggs

Abstract

We measure the economic value of diversification for international multiasset investment strategies. This study implements five existing diversification measures and proposes a novel measure of diversification, the unsystematic risk ratio (URR). Only the URR and the effective number of bets measures predict the future risk-adjusted performance. These relations are robust to the choice of investment horizon and degree of relative risk aversion. The diversification benefits are larger for the frontier and emerging markets than for the developed markets, for multiasset strategies than for single asset class strategies, and for the pre-crisis and post-crisis periods than for the financial crisis period.

Listed Infrastructure Assets as a Tool for Diversification

“…The entropy type of measurements and the purely weight-based measurements of diversification only takes the weight distribution into account whereas the risk distribution is ignored. For a comprehensive review of such diversification measures, see (Sharma & Vipul, 2018).…”

How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature

“…In addition, it exhibits similar diversification properties to time-series variance (Brands and Gallagher 2005). Further, very little is known about Value-at-Risk (VaR), the median absolute deviation for risk, mean absolute deviation (MAD) (Fielitz 1974;Alexeev and Tapon 2012), or even unsystematic risk ratio (URR) (Sharma and Vipul 2018) as a risk measure. Mean absolute deviation (MAD) uses absolute deviation instead of variance as the portfolio risk measure, whereas the URR provides the measure of diversification relative to its variance.…”

“…Mean absolute deviation (MAD) uses absolute deviation instead of variance as the portfolio risk measure, whereas the URR provides the measure of diversification relative to its variance. It has been stated that the URR could serve as a statistically significant predictor of future risk-adjusted performance (Sharma and Vipul 2018). Taken as a whole, portfolio constructions created by different risk measures vary quite significantly from one risk measure to another.…”

“…Based on the results, most studies in the past have used the variance or standard deviation of returns as a metric to assess risk reduction (Evans and Archer 1968;Solnik 1974;Statman 1987;Beck et al 1996), and this has continued to be the authors' first choice in recent years (Brands and Gallagher 2005;Benjelloun 2010). On the other hand, several studies have also used terminal wealth standard deviation (TMSD) in their analysis (O'Neal 1997;Brands and Gallagher 2005;Benjelloun 2010), but also mean absolute deviation (MAD) (Fielitz 1974;Alexeev and Tapon 2012) or even unsystematic risk ration (URR) (Sharma and Vipul 2018). Barber and Odean (2000) To analyze the performance of a randomly selected sample of 166 investment clubs.…”

“…In addition, Ngene et al (2018) emphasize a low or negative correlation between the U.S. and each frontier market. Further, Sharma and Vipul (2018) emphasize that frontier and emerging markets provide a higher level of diversification possibilities for investors compared to developed markets. Studies have shown that U.S. investors could benefit by adding stocks from emerging markets to their solely domestic portfolios (Susmel 2001), as well as by adding them to a portfolio of developed market equities (Conover et al 2002).…”