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Risk minimization and portfolio diversification

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  • Farzad Pourbabaee
  • Minsuk Kwak
  • Traian A. Pirvu

Abstract

We consider the problem of minimizing capital at risk in the Black-Scholes setting. The portfolio problem is studied given the possibility that a correlation constraint between the portfolio and a financial index is imposed. The optimal portfolio is obtained in closed form. The effects of the correlation constraint are explored; it turns out that this portfolio constraint leads to a more diversified portfolio.

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  • Farzad Pourbabaee & Minsuk Kwak & Traian A. Pirvu, 2014. "Risk minimization and portfolio diversification," Papers 1411.6657, arXiv.org, revised Dec 2014.
    • Handle: RePEc:arx:papers:1411.6657
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    References listed on IDEAS

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    1. Eckhard Platen, 2006. "A Benchmark Approach To Finance," Mathematical Finance, Wiley Blackwell, vol. 16(1), pages 131-151, January.
    2. Priscilla Serwaa Nkyira Gambrah & Traian Adrian Pirvu, 2014. "Risk Measures and Portfolio Optimization," JRFM, MDPI, vol. 7(3), pages 1-17, September.
    3. Carole Bernard & Franck Moraux & Ludger R�schendorf & Steven Vanduffel, 2015. "Optimal payoffs under state-dependent preferences," Quantitative Finance, Taylor & Francis Journals, vol. 15(7), pages 1157-1173, July.
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    5. Gordana Dmitrašinović-Vidović & Ali Lari-Lavassani & Xun Li & Antony Ware, 2011. "Dynamic Portfolio Selection Under Capital-At-Risk With No Short-Selling Constraints," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 14(06), pages 957-977.
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    7. Markowitz, Harry M, 1991. "Foundations of Portfolio Theory," Journal of Finance, American Finance Association, vol. 46(2), pages 469-477, June.
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