Abstract:The maximum diversification has been shown in the literature to depend on the vector of asset volatilities and the inverse of the covariance matrix of the asset return covariance matrix. In practice, these two quantities need to be replaced by their sample statistics. The estimation error associated with the use of these sample statistics may be amplified due to (near) singularity of the covariance matrix, in financial markets with many assets. This, in turn, may lead to the selection of portfolios that are fa… Show more
“…The diversification ratio of a portfolio is the measure of diversification that is gained from holding securities that do not have a perfect correlation and, intuitively, portfolios that consist of securities with high correlation figures will not be well diversified and possess a very low diversification ratio (Kone, 2021).…”
Section: Maximum Diversification Portfoliomentioning
Orientation:The performance of three different portfolio allocation strategies is assessed in a developed and a developing economy during different economic conditions over a period of seven years.Research purpose: Evaluate the performance of the portfoliosnamely, the tangent, minimum-variance, and maximally diversified portfolioacross a developed and a developing economy and investigate the advantages and disadvantages that each portfolio poses in differing economic conditions.Motivation for the study: Understanding the benefits and drawbacks of each of these portfolios in times of crisis and in times of economic expansion could assist asset managers in making effectiveallocation decisions for their portfolios in different economic conditions.Research approach/design and method: Portfolio optimisation under various constraints.
Main findings:Tangent portfolios produced superior returns to the other portfolios and the US portfolios consistently outperformed the South African ones. The minimum variance portfolio provided greater returns and downside protection than the maximally diversified portfolio during the COVID-19 market crash for the developed economy, while the opposite was observed for the developing economy.Practical/managerial implications: Practical knowledge of how each of the portfolios perform within different economic climates can assist asset managers to produce positive performance in times of recession and expansion.Contribution/value-add: Information and analysis on each of these portfolio asset allocation strategies during various economic conditions assists asset managers in finding the most effective way to structure their portfolios.
“…The diversification ratio of a portfolio is the measure of diversification that is gained from holding securities that do not have a perfect correlation and, intuitively, portfolios that consist of securities with high correlation figures will not be well diversified and possess a very low diversification ratio (Kone, 2021).…”
Section: Maximum Diversification Portfoliomentioning
Orientation:The performance of three different portfolio allocation strategies is assessed in a developed and a developing economy during different economic conditions over a period of seven years.Research purpose: Evaluate the performance of the portfoliosnamely, the tangent, minimum-variance, and maximally diversified portfolioacross a developed and a developing economy and investigate the advantages and disadvantages that each portfolio poses in differing economic conditions.Motivation for the study: Understanding the benefits and drawbacks of each of these portfolios in times of crisis and in times of economic expansion could assist asset managers in making effectiveallocation decisions for their portfolios in different economic conditions.Research approach/design and method: Portfolio optimisation under various constraints.
Main findings:Tangent portfolios produced superior returns to the other portfolios and the US portfolios consistently outperformed the South African ones. The minimum variance portfolio provided greater returns and downside protection than the maximally diversified portfolio during the COVID-19 market crash for the developed economy, while the opposite was observed for the developing economy.Practical/managerial implications: Practical knowledge of how each of the portfolios perform within different economic climates can assist asset managers to produce positive performance in times of recession and expansion.Contribution/value-add: Information and analysis on each of these portfolio asset allocation strategies during various economic conditions assists asset managers in finding the most effective way to structure their portfolios.
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