A1537
Title: An empirical comparison between investing strategies: Maximum diversification versus minimum risk
Authors: Pierpaolo Uberti - University of Milano-Bicocca (Italy) [presenting]
Maria-Laura Torrente - University of Genova, Dipartimento di Economia (Italy)
Abstract: In well-defined experimental settings, the out-of-sample performance of two asset allocation paradigms is evaluated: minimum risk and maximum diversification. Specifically, for each given risk measure, the optimal minimum risk allocation is compared with the allocation obtained maximizing a portfolio diversification measure induced by the same risk measure. The experiment is performed in an out-of-sample long-only framework, considering proportional transaction costs and different lengths of the estimation window and the holding period. The strategies are compared in terms of numerical stability, return, Sharpe ratio and risk measured through the same risk measures used for the calculation of the optimal allocation: variance of returns, mean absolute deviation, Value-at-risk and expected shortfall both at a significance level of 1\% and 5\%. It is shown that the maximum diversification strategies are very competitive, if not better in general than the risk minimization allocations. This result confirms well-known empirical findings of naive investment strategies that are difficult to beat in practice.
