1. Risk-adjusted geometric diversified portfolios.
- Author
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Torrente, Maria-Laura and Uberti, Pierpaolo
- Subjects
PORTFOLIO diversification ,MAXIMUM entropy method ,EUCLIDEAN distance ,ASSET allocation ,ENTROPY - Abstract
In this paper, exploiting a geometric argument, a novel and intuitive approach to portfolio diversification is proposed. The risk-adjusted geometric diversified portfolio is obtained as the point that is equally distant, for a given distance, from the vertices of the simplex, as they represent the single asset portfolios, the worst portfolios in terms of diversification. The definition of risk-adjusted distance as a special case of weighted Euclidean distance permits to introduce the information on the risks of the assets composing the portfolio in a very general way. The closed form solution for the allocation problem is provided and interesting theoretical properties are proved. Further, a direct comparison with Rao's Quadratic Entropy maximization problem is outlined, thus yielding a different perspective to the use of such entropy as a diversification measure. Finally, the effectiveness of our proposal is emphasized through a comprehensive empirical out-of-sample exercise on real financial data. [ABSTRACT FROM AUTHOR]
- Published
- 2024
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