Optimal Strategy Design for Portfolio Selection: an Inverse Risk Weighting Analysis

Andrés Puerta and Henry Laniado

Lecturas de Economía, 2010, issue 73, 243-273

Abstract: This article analyzes the behavior of the portfolio selection strategy that assigns to each asset a weight inversely proportional to individual risk (PIR) in comparison with the classical mean-variance (MV), minimum variance (MINVAR) and 1/N strategies. In doing so and applied to the Colombian stock market, this study performs out-of-sample estimates and provides conditions under which PIR weights lead to less riskier strategies than the 1/N strategy. In conclusion, the evidence suggests that the PIR strategy outperforms classical strategies in terms of profitability indicators, risk, Sharpe ratio, Turnover (cost) and Turnover (stability).

Keywords: Investment portfolios; securities; profitability; risk; inverse risk weighting. (search for similar items in EconPapers)
JEL-codes: Q56 R52 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:lde:journl:y:2010:i:73:p:243-273

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