### Most Diversified Portfolio Performance

**April 24, 2013** - Strategic Allocation

Is there a portfolio diversification approach that beats widely used mean-variance optimization and risk parity approaches? In their July 2011 paper entitled “Properties of the Most Diversified Portfolio”, Yves Choueifaty, Tristan Froidure and Julien Reynier compare the performance metrics of their Most Diversified Portfolio (MDP) to those of portfolios based on market capitalization (MKT), equal weight (EW), equal risk contribution (ERC) and minimum variance (MV). They define MDP for a given set of assets as the long-only portfolio with the maximum diversification ratio (weighted average portfolio component volatility divided by aggregate portfolio volatility). They constrain all competing portfolios to be fully invested, long only and unleveraged. For empirical testing, they reform all portfolios semi-annually from the top half of stocks the MSCI World Index by market capitalization. They use a one-year rolling historical window of daily returns to estimate asset volatilities and pairwise correlations as inputs for the MV, ERC and MDP allocations. Using daily and monthly returns for the specified MSCI World Index stocks and contemporaneous monthly Fama-French risk factors (market, size and book-to-market ratio) during 1999 through 2010, *they find that:* Keep Reading