Do optimal diversification strategies outperform the 1/N strategy in U.K. stock returns

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9 Citations (Scopus)

Abstract

This paper examines whether optimal diversification strategies outperform the 1/N strategy in U.K. stock returns. The study focuses on the performance of recent strategies developed by Tu and Zhou(2011) and Kirby and Ostdiek(2010). I find that a number of optimal asset allocation strategies can significantly outperform the 1/N strategy even after adjusting for trading costs. The strategies developed by Kirby and Ostdiek outperform the 1/N strategy, even at higher trading costs, due to the low turnover of these strategies. The strategies of Tu and Zhou have mixed performance after adjusting for trading costs due to the high turnover of these strategies. The results of the paper provide support for the use of optimal diversification strategies.
LanguageEnglish
Pages375–385
Number of pages11
JournalInternational Review of Financial Analysis
Volume20
Issue number5
Early online date10 Aug 2011
DOIs
Publication statusPublished - Oct 2011

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Stock returns
Diversification strategy
Trading costs
Turnover
Optimal asset allocation

Keywords

  • estimation risk
  • estimation error
  • combined portfolio strategies
  • mean-variance timing

Cite this

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abstract = "This paper examines whether optimal diversification strategies outperform the 1/N strategy in U.K. stock returns. The study focuses on the performance of recent strategies developed by Tu and Zhou(2011) and Kirby and Ostdiek(2010). I find that a number of optimal asset allocation strategies can significantly outperform the 1/N strategy even after adjusting for trading costs. The strategies developed by Kirby and Ostdiek outperform the 1/N strategy, even at higher trading costs, due to the low turnover of these strategies. The strategies of Tu and Zhou have mixed performance after adjusting for trading costs due to the high turnover of these strategies. The results of the paper provide support for the use of optimal diversification strategies.",
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Do optimal diversification strategies outperform the 1/N strategy in U.K. stock returns. / Fletcher, Jonathan.

In: International Review of Financial Analysis, Vol. 20, No. 5, 10.2011, p. 375–385.

Research output: Contribution to journalArticle

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