On the optimal selection of portfolios under limited diversification

We address the problem of selecting portfolios which maximize the ratio of the average excess return to the standard deviation, among all those portfolios which comprise at most a pre-specified number, k, of securities. Under the assumptions of constant pairwise correlations and no short-selling, we...

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Bibliographic Details
Published in:Journal of banking & finance 1999-11, Vol.23 (11), p.1655-1666
Main Authors: Sankaran, Jayaram K., Patil, Ajay A.
Format: Article
Language:English
Subjects:
Algorithms
Banking
Correlation analysis
Diversification
Fixed transactions costs
Investment policy
Limited diversification
Marginal benefits from diversification
Mathematical models
Mean–variance efficient portfolios
Optimal portfolio selection
Optimization
Portfolio management
Portfolio selection
Ranking algorithms
Securities issues
Stock returns
Studies
Transaction costs
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Summary:We address the problem of selecting portfolios which maximize the ratio of the average excess return to the standard deviation, among all those portfolios which comprise at most a pre-specified number, k, of securities. Under the assumptions of constant pairwise correlations and no short-selling, we argue that the simple ranking procedure of Elton, Gruber, and Padberg effectively solves the problem for all values of k, and that as a function of k, the optimal ratio increases at a decreasing rate. We also clarify why further generalization or extension of our results to other situations is improbable.
ISSN:0378-4266
1872-6372
DOI:10.1016/S0378-4266(99)00023-0