A Novel Approach for Naive Diversification: An Application of Multiple Risk Measures to Enhance 1/N Portfolio Performance

The 1/N investment strategy, characterized by equally allocating wealth among available investment options, has garnered significant scholarly attention. Simultaneously, risk assessment and management play a critical role in financial decision-making, leading to the development of a diverse array of risk measure models. This paper aims to synthesize these two strategies and propose a novel approach for constructing a naive diversification strategy by incorporating commonly employed risk measures in financial analysis. The research involves an in-depth exploration of various risk measures utilized by financial professionals to enhance effective risk management. These measures include Mean-Variance (MV), Mean Absolute Deviation (MAD), Semi Standard Deviation (MSV), Value at Risk (VaR), Conditional Value at Risk (CVaR), Entropic Value at Risk (EVaR), Drawdown at Risk (DaR) of uncompounded cumulative returns, Conditional Drawdown at Risk (CDaR) of uncompounded cumulative returns, and Entropic Drawdown at Risk (EDaR) of uncompounded cumulative returns. To validate the efficacy of the proposed model, a real-world empirical case study utilizing the annual financial statements of the NASDAQ-100 (NDX) database is conducted. The empirical findings from this study carry practical implications for investors and risk managers engaged in portfolio management.

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Publication Details

Journal
SHILAP Revista de lepidopterología
Published
2024-08-14
DOI
https://doi.org/10.5281/zenodo.13321037
Primary Topic
Risk and Portfolio Optimization
Type
article
Field-Weighted Citation Impact
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article

A Novel Approach for Naive Diversification: An Application of Multiple Risk Measures to Enhance 1/N Portfolio Performance

SHILAP Revista de lepidopterología
Risk and Portfolio Optimization
article

A Novel Approach for Naive Diversification: An Application of Multiple Risk Measures to Enhance 1/N Portfolio Performance

article en

Abstract

The 1/N investment strategy, characterized by equally allocating wealth among available investment options, has garnered significant scholarly attention. Simultaneously, risk assessment and management play a critical role in financial decision-making, leading to the development of a diverse array of risk measure models. This paper aims to synthesize these two strategies and propose a novel approach for constructing a naive diversification strategy by incorporating commonly employed risk measures in financial analysis. The research involves an in-depth exploration of various risk measures utilized by financial professionals to enhance effective risk management. These measures include Mean-Variance (MV), Mean Absolute Deviation (MAD), Semi Standard Deviation (MSV), Value at Risk (VaR), Conditional Value at Risk (CVaR), Entropic Value at Risk (EVaR), Drawdown at Risk (DaR) of uncompounded cumulative returns, Conditional Drawdown at Risk (CDaR) of uncompounded cumulative returns, and Entropic Drawdown at Risk (EDaR) of uncompounded cumulative returns. To validate the efficacy of the proposed model, a real-world empirical case study utilizing the annual financial statements of the NASDAQ-100 (NDX) database is conducted. The empirical findings from this study carry practical implications for investors and risk managers engaged in portfolio management.

SHILAP Revista de lepidopterología
Iran University of Science and Technology (IR)
Peace, Justice and strong institutions
Openalex Percentile: Top 60%
Risk and Portfolio Optimization
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