Performance of Naïve Diversification (1/N rule)
UNIVERSITY OF TECHNOLOGY SYDNEY
Research Seminars in Finance
Topic: The Jury is Still Out On the Performance of Naïve Diversification (1/N rule)
Speaker: Redouane Elkamhi, University of Toronto
Abstract: DeMiguel et al. (2009b) made a compelling case that estimation error dwarfs any diversification benefits of mean-variance portfolios, making the naïve diversification (1/N) a dominating strategy. In this paper, we show that the jury is still out on the relative performance of 1/N. We evaluate risk-based allocations across fifteen empirical datasets and show that they outperform out-of-sample the 1/N rule in terms of Sharpe ratio, certainty-equivalent returns and turnover. Applying clustering further enhances their performance. We present simulation exercises to illustrate the source of the outperformance of risk-based diversification and show that clustering can uncover the risk factors driving asset returns.
Moderator: Vitali Alexeev, University of Technology Sydney
Date: Wednesday, 12th August 2020
Time: 9.00 – 10.00 a.m. (Australian Eastern Standard Time)
Venue: This is on online Zoom webinar.
After registering, you will receive a confirmation email containing information on how to join the meeting, including an access link.
- The webinar will run for 45 minutes, followed by a 15 minute Q&A session.
- There will be a moderator for each seminar event, who will facilitate communication and resolve any technical issues.
- Participants can use the Q&A facility to ask questions during the presentation. The moderator will then alert the speaker and ask the questions raised.
Co-ordinator: Harry Scheule
Enquiries: Duncan Ford