IN SEARCH OF MAXIMUM DIVERSIFICATION PORTFOLIO

Diversification is a fundamental concept of asset allocation. In this paper, I propose an in-depth analysis of portfolio diversification strategies. First I describe the main indicators of risk, return and diversification in a portfolio. Next, I build and test portfolio strategies in two crisis periods: the financial crisis of 2008-2009 and the economic crisis following the COVID 19 pandemic. Strategies based on statistical and mathematical principles (e.g., principal component analysis) have lower maximum losses but perform worse than the others in the recovery period. The lower sensitivity to negative shocks also implies a lower sensitivity to market bullish shocks: in fact the Naive Portfolio (simplest diversification strategy) presents better performance, at the end of the evaluation period. To improve this criticality, I extend the estimation period. As a result of my study, I have observed that portfolios built using longer estimation intervals perform better, especially during the recovery phase.