Performance of Naïve Diversification (1/N rule)

UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Department
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.

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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.

Seminar protocols:

  • 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

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Acknowledgement of Country

UTS acknowledges the Gadigal people of the Eora Nation, the Boorooberongal people of the Dharug Nation, the Bidiagal people and the Gamaygal people, upon whose ancestral lands our university stands. We would also like to pay respect to the Elders both past and present, acknowledging them as the traditional custodians of knowledge for these lands.