The maximum diversification investment strategy: A portfolio performance comparison

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.

Keywords

• maximum diversification
• portfolio risk
• optimal portfolio selection
• performance