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Diversification in Small Portfolios

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Part of the Advances in Computational Management Science book series (AICM, volume 8)

4.4 Conclusion

For various reasons, investors tend to hold a rather small number of assets. In this chapter, a method has been presented to approach the associated NP hard optimization problem of selecting the optimal set of assets under a given market situation and expectations. The main results from this empirical study are twofold: (i) the well known fact of decreasing marginal contribution to diversification is not only confirmed, but can be exploited by identifying those assets that, in combination, offer the highest risk premium; (ii) it has been shown that alternative rules, frequently found in practice, are likely to underperform as they offer solutions with risk premia lower than would be possible under the same constraints and market situations.

Keywords

Risk Premium Knapsack Problem Sharpe Ratio Capital Asset Price Model Cardinality Constraint 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer 2005

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