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The maximum diversification investment strategy: A portfolio performance comparison

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  • Ludan Theron
  • Gary van Vuuren

Abstract

The efficacy of four different portfolio allocation strategies is evaluated according to their absolute returns during different economic conditions over a period of 10 years. A comparison is drawn between the Most Diversified portfolio (MD) and three alternatives; a Minimum Variance portfolio, an Equally-Weighted portfolio and a Tangent (or Maximum Sharpe ratio) portfolio. The aim is to assess portfolio performance using cumulative returns, the Sharpe ratio and the daily volatilities of each portfolio. The four asset allocation methods are governed by multiple constraints. Although previous work has shown that MD portfolios exhibit greater diversification and a higher Sharpe ratio than other investment strategies, this was not found using developed market index data.

Suggested Citation

  • Ludan Theron & Gary van Vuuren, 2018. "The maximum diversification investment strategy: A portfolio performance comparison," Cogent Economics & Finance, Taylor & Francis Journals, vol. 6(1), pages 1427533-142, January.
    • Handle: RePEc:taf:oaefxx:v:6:y:2018:i:1:p:1427533
    DOI: 10.1080/23322039.2018.1427533
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    Cited by:

    1. Yusuke Uchiyama & Takanori Kadoya & Kei Nakagawa, 2018. "Complex Valued Risk Diversification," Papers 1810.04370, arXiv.org.
    2. Zihao Zhang & Stefan Zohren & Stephen Roberts, 2020. "Deep Learning for Portfolio Optimization," Papers 2005.13665, arXiv.org, revised Jan 2021.
    3. Alim, Wajid & Ali, Amjad & Farid, Maryiam, 2021. "The Impact of Islamic Portfolio on Risk and Return," MPRA Paper 111211, University Library of Munich, Germany.
    4. Chao Zhang & Zihao Zhang & Mihai Cucuringu & Stefan Zohren, 2021. "A Universal End-to-End Approach to Portfolio Optimization via Deep Learning," Papers 2111.09170, arXiv.org.
    5. Ozdemir, Huseyin & Ozdemir, Zeynel Abidin, 2021. "A Survey of Hedge and Safe Havens Assets against G-7 Stock Markets before and during the COVID-19 Pandemic," IZA Discussion Papers 14888, Institute of Labor Economics (IZA).
    6. N’Golo Koné, 2020. "Regularized Maximum Diversification Investment Strategy," Econometrics, MDPI, vol. 9(1), pages 1-23, December.

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