Diversification of the banks investment portfolio: an adaptive management model in the conditions of financial volatility

In the context of increased financial volatility and macroeconomic instability, enhancing the efficiency of banks’ investment activity has become a strategic imperative. One of the most relevant approaches is the structural optimization of investment portfolios through asset diversification. However, existing models often fail to fully consider the correlation between portfolio components, their volatility, and market sensitivity, which significantly limits the accuracy of investment decision-making. This research aims to develop a scientifically grounded approach to improving the efficiency of credit and investment activity in banks by optimizing the portfolio structure. The core focus is placed on asset diversification based on risk-return trade-offs and inter-asset correlation to ensure portfolio resilience under volatile financial conditions. The study applies structural-functional analysis, portfolio optimization techniques, multi-factor performance assessment, and correlation-based risk modeling. The proposed methodology is empirically tested using a reference bank constructed based on the median values of Ukrainian banking sector indicators. The implementation of a diversification-based approach, incorporating assets with low mutual correlation, has resulted in an increase in the overall portfolio efficiency index from 67.2% to 75.6%. Simultaneously, total market risk was reduced from 7.66% to 5.08%, and unsystematic risk was fully neutralized. Although the average return of the portfolio slightly declined, the decrease in potential losses and increased resilience to market fluctuations contributed to an overall improvement in portfolio performance. The findings confirm that substantial risk reduction can only be achieved through a portfolio-based approach. Sole reliance on individual asset assessments does not allow for an accurate evaluation of diversification effects. The proposed model enables banks to align their investment strategies with changing market conditions, thereby enhancing the sustainability of cash flows and the effectiveness of credit and investment operations.