naïve diversification
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2022 ◽  
Author(s):  
Muhammad Jaffar Sadiq Abdullah ◽  
Norizarina Ishak

In this chapter, Markowitz mean-variance approach is proposed for examining the best portfolio diversification strategy within three subperiods which are during the global financial crisis (GFC), post-global financial crisis, and during the non-crisis period. In our approach, we used 10 securities from five different industries to represent a risk-mitigation parameter. In this way, the naive diversification strategy is used to serve as a comparison for the approach used. During the computation process, the correlation matrices revealed that the portfolio risk is not well diversified during non-crisis periods, meanwhile, the variance-covariance matrices indicated that volatility can be minimized during portfolio construction. On this basis, 10 efficient portfolios were constructed and the optimal portfolios were selected in each subperiods based on the risk-averse preference. Performance-wise that optimal portfolio dominated the naïve strategy throughout the three subperiods tested. All the optimal portfolios selected are yielding more returns compared to the naïve portfolio.


Entropy ◽  
2021 ◽  
Vol 23 (10) ◽  
pp. 1266
Author(s):  
Weng Siew Lam ◽  
Weng Hoe Lam ◽  
Saiful Hafizah Jaaman

Investors wish to obtain the best trade-off between the return and risk. In portfolio optimization, the mean-absolute deviation model has been used to achieve the target rate of return and minimize the risk. However, the maximization of entropy is not considered in the mean-absolute deviation model according to past studies. In fact, higher entropy values give higher portfolio diversifications, which can reduce portfolio risk. Therefore, this paper aims to propose a multi-objective optimization model, namely a mean-absolute deviation-entropy model for portfolio optimization by incorporating the maximization of entropy. In addition, the proposed model incorporates the optimal value of each objective function using a goal-programming approach. The objective functions of the proposed model are to maximize the mean return, minimize the absolute deviation and maximize the entropy of the portfolio. The proposed model is illustrated using returns of stocks of the Dow Jones Industrial Average that are listed in the New York Stock Exchange. This study will be of significant impact to investors because the results show that the proposed model outperforms the mean-absolute deviation model and the naive diversification strategy by giving higher a performance ratio. Furthermore, the proposed model generates higher portfolio mean returns than the MAD model and the naive diversification strategy. Investors will be able to generate a well-diversified portfolio in order to minimize unsystematic risk with the proposed model.


Ekonomika ◽  
2021 ◽  
Vol 100 (1) ◽  
pp. 156-174
Author(s):  
Darja Demcenko

This paper provides a deep analysis of ten globally diversified portfolios, composed of different financial instruments: bonds, shares, ETF’s, commodities, indexes, currencies, constructed applying various optimization techniques.  Statistical moments, such as mean, standard deviation, kurtosis and skewness of portfolios are compared and discussed. Moreover, performance of the portfolios within the time horizon of one year estimating Sharpe ratio, Treynor ratio, Sortino ratio is presented. Furthermore, a risk analysis of created portfolios is evaluated in terms of historical VaR and CVaR applying confidence interval 95%. The main results of this paper reveal that the portfolio, which is optimized to minimize VaR produces high expected shortfall. Secondly, the Risk Parity portfolio, despite reducing volatility, has delivered the highest kurtosis of the return, which may indicate the possible tail loss. Furthermore, the maximum Sharpe ratio portfolio has delivered extremely high kurtosis in comparison with the kurtosis of the other portfolios. Finally, it is observed that for the Naïve diversification portfolio it has been typical to have the highest downside deviation.    


Author(s):  
Bacem Benjlijel

The mean–variance framework developed by Markowitz (1952). Portfolio selection, The Journal of Finance, 7(1), 77–91 is still the major model used nowadays in asset allocation and active portfolio management. However, the estimated mean–variance rules often fail to deliver superior performance compared with the simple naïve rule (the equally weighted portfolio) due to the problem of estimation errors. In this paper, I propose a portfolio construction method that is effective in dealing with estimation errors in the optimization process. Particularly, I specify the portfolio weights as an optimal combination of the equally weighted portfolio and a sample zero-investment portfolio. I show analytically that the proposed method alleviates the problem of estimation errors and dominates naïve diversification. I suggest two implementable versions of the combining method and show, empirically, their good performances relative to the naïve rule. The newly developed rules work well, particularly, for portfolios with a medium and high number of assets. Moreover, the outperformance persists generally even in the presence of transaction costs. Since the combinations are theory-based, my study may be interpreted as reaffirming the usefulness of the Markowitz portfolio theory in practice.


2021 ◽  
Vol 10 (1) ◽  
pp. 15
Author(s):  
Baiq Nurul Suryawati ◽  
Laila Wardani ◽  
Muttaqillah Muttaqillah ◽  
Iwan Kusmayadi

This study aims at applying naïve diversification-based modeling in formation of optimal portfolios and to test the superiority of these portfolios against its sectoral indexes. The population of this study are all companies listed on the Indonesia Stock Exchange which are grouped into 10 sectors, namely: Agriculture; Basic Industry; Consumer; Finance; Infrastructure; Manufacture; Mining; Miscelanous Industry; Property; and Trade. The sample of this company is Top 10 Constituents in each company sector listed in the fact sheet per sector, published by the Indonesia Stock Exchange. The analytical tools used were paired sample statistics, paired sample correlations and significance tests. The results shows that portfolio formed with naïve diversification modeling shows its superiority compared to its sectoral portfolio. The correlation test shows moderate significance relationship between returns and standard deviation of sectoral portfolios with naïve diversification-based portfolios, while beta shows no meaningful relationship between sectoral portfolios and portfolios with naïve diversification modeling. Discrimination tests show the significance of returns and standard deviations between sectoral and naïve diversification modeling-based portfolios. While in line with the correlation test, there is no significant difference between the beta of the two portfolios, so it appears that the volatility of the two portfolios cannot be separated from overall market movement. For bearish market conditions, the level of portfolio loss using naïve diversification modeling is lower than sector-based portfolios in the Indonesia Stock Exchange.Keywords:investment, sector indexes, simplified, portfolio modelling 


Accounting ◽  
2021 ◽  
pp. 1033-1048
Author(s):  
Ternence T. J. Tan ◽  
Baliira Kalyebara

Since late 2019 and throughout 2020, the global economy has been experiencing difficult times due to the outbreak of the lethal Coronavirus (COVID-19). This study looks at the financial impact of this epidemic on the global economy using Malaysian market index i.e., FTSE Bursa Malaysia KLCI before and during COVID-19. Measuring the financial impact of this epidemic on the Malaysia economy may help policy makers to develop measures to avert similar financial catastrophic impacts on the global economy. The study uses Sharpe optimal and naïve diversification model to solve a scenario that factors in the level of corporate social responsibility (CSR) exhibited before and during the epidemic to measure the financial impact on the stock portfolio. The results show that the emergence of COVID-19exacerbated the already weak Malaysian economy. Our findings may help the policy makers in Malaysia to develop and maintain techniques and policies that may mitigate the negative financial impact and handle similar epidemics in the future. Future studies could cover the financial impact of CSR using variable scoring and apply the portfolio model with practical and prevailing constraints.


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