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

Jonathan Fletcher

International Review of Financial Analysis, 2011, vol. 20, issue 5, 375-385

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.

Keywords: Estimation risk; Mean–variance timing; Combined portfolio strategies (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:20:y:2011:i:5:p:375-385

DOI: 10.1016/j.irfa.2011.07.002

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