Portfolio weights concentration: optimal strategies and equilibrium implications

Paskalis Glabadanidis

International Journal of Managerial Finance, 2022, vol. 19, issue 3, 572-582

Abstract: Purpose - The purpose of this article is to help investors build less-concentrated portfolios as well as to construct optimal return-concentration portfolios. Design/methodology/approach - An alternative portfolio objective is proposed where investors care about the level of concentration of their portfolio weights. Minimizing the concentration of portfolio weights leads to the well-known equal-weight portfolio as the optimal choice. Maximizing the trade-off between the portfolio's expected return and the weight concentration produces a novel portfolio with weights proportional to the expected return of each security. Findings - An empirical application with 30 industry portfolios and 1,000 individual stocks finds that both proposed strategies perform well out-of-sample both in terms of the proposed concentration measure but also in terms of more traditional risk-based measures like Sharpe ratios, abnormal returns and market betas. Originality/value - The optimal risk-concentration portfolio proposed in this paper is a novel result. The portfolio generalizes prior practitioner intuition on focusing on securities with the highest expected returns and the concept of diversification.

Keywords: Portfolio weights concentration; Minimally concentrated weights; Maximum return weight concentration trade-off; Equilibrium implications (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:ijmf-03-2022-0098

DOI: 10.1108/IJMF-03-2022-0098

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