Risk minimization and portfolio diversification

Farzad Pourbabaee, Minsuk Kwak and Traian A. Pirvu

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Abstract: We consider the problem of minimizing capital at risk in the Black-Scholes setting. The portfolio problem is studied given the possibility that a correlation constraint between the portfolio and a financial index is imposed. The optimal portfolio is obtained in closed form. The effects of the correlation constraint are explored; it turns out that this portfolio constraint leads to a more diversified portfolio.

Date: 2014-11, Revised 2014-12
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1411.6657

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