A1121
Title: When does centrality matter in portfolio choice?
Authors: Roope Rihtamo - University of Turku (Finland) [presenting]
Joni Virta - University of Turku (Finland)
Harto Saarinen - University of Turku (Finland)
Henri Nyberg - University of Turku (Finland)
Abstract: The purpose is to examine the inverse relationship between network centrality measures and optimal weights of a variance-minimizing portfolio allocation. Previous results and their underlying assumptions are revisited, considering alternative perspectives and refinements proposed in the literature to provide a deeper understanding of the suggested relationship. Building on this, the necessary and sufficient conditions are derived, under which the inverse relation between centrality and optimal weights holds. Using analytical and computational results, it is shown that certain simple and natural covariance structures satisfy these conditions. Furthermore, the theoretical insights are empirically validated using return data from the constituents of the S\&P500 index. Findings offer investors guidance on when and how centrality-based measures can be used for portfolio selection. The contribution is to bridging complex network theory with classical portfolio optimization, offering practical implications applicable to various investment strategies.
