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Portfolio weights concentration: optimal strategies and equilibrium implications

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  • Paskalis Glabadanidis

Abstract

Purpose - The purpose of this article is to help investors build less-concentrated portfolios as well as to construct optimal return-concentration portfolios. Design/methodology/approach - An alternative portfolio objective is proposed where investors care about the level of concentration of their portfolio weights. Minimizing the concentration of portfolio weights leads to the well-known equal-weight portfolio as the optimal choice. Maximizing the trade-off between the portfolio's expected return and the weight concentration produces a novel portfolio with weights proportional to the expected return of each security. Findings - An empirical application with 30 industry portfolios and 1,000 individual stocks finds that both proposed strategies perform well out-of-sample both in terms of the proposed concentration measure but also in terms of more traditional risk-based measures like Sharpe ratios, abnormal returns and market betas. Originality/value - The optimal risk-concentration portfolio proposed in this paper is a novel result. The portfolio generalizes prior practitioner intuition on focusing on securities with the highest expected returns and the concept of diversification.

Suggested Citation

  • Paskalis Glabadanidis, 2022. "Portfolio weights concentration: optimal strategies and equilibrium implications," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 19(3), pages 572-582, May.
    • Handle: RePEc:eme:ijmfpp:ijmf-03-2022-0098
    DOI: 10.1108/IJMF-03-2022-0098
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    References listed on IDEAS

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