A return-diversification approach to portfolio selection

Francesco Cesarone (), Rosella Giacometti (), Manuel L. Martino () and Fabio Tardella ()
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Francesco Cesarone: Roma Tre University
Rosella Giacometti: Bergamo University
Manuel L. Martino: Roma Tre University
Fabio Tardella: University of Florence

Computational Management Science, 2025, vol. 22, issue 2, No 5, 31 pages

Abstract: Abstract In this paper, we propose a general bi-objective model for portfolio selection, aiming to maximize both a diversification measure and the portfolio expected return. Within this general framework, we focus on maximizing a diversification measure recently proposed by Choueifaty and Coignard for the case of volatility as a risk measure. We first show that the maximum diversification approach is actually equivalent to the Risk Parity approach using volatility under the assumption of equicorrelated assets. Then, we extend the maximum diversification approach formulated for general risk measures. Finally, we provide explicit formulations of our bi-objective model for different risk measures, such as volatility, Mean Absolute Deviation, Conditional Value-at-Risk, and Expectiles, and we present extensive out-of-sample performance results for the portfolios obtained with our model. The empirical analysis, based on five real-world data sets, shows that the return-diversification approach provides portfolios that tend to outperform the strategies based only on a diversification method or on the classical risk-return approach.

Keywords: Risk diversification; Most diversified portfolio; Bi-objective optimization; Risk parity; Portfolio selection; Expectiles (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10287-025-00538-1

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