Maximizing the diversification ratio in the Norwegian stock market : a portfolio approach in the period 2000-2012
Master thesis
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http://hdl.handle.net/11250/135913Utgivelsesdato
2013Metadata
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Sammendrag
This analysis is based on the article by Choueifaty & Coignard (2008) where a “most-diversified portfolio” (MDP) is compared to a market capitalization – weighted benchmark, a global minimum variance portfolio and an equally-weighted portfolio. The weight allocation of assets in a MDP is determined by maximizing the diversification ratio. They show that the MDP outperforms the other portfolios in terms of higher diversification ratio and higher Sharpe ratio. In this analysis I determine if similar results can be achieved in the Norwegian stock market, for the MDP. I focus on the portfolio performance and the portfolio diversification, although these two terms coincide to some degree. The annualized Sharpe ratio measures the performances, while the diversification ratio, rolling volatility and correlations are used to measure diversification. I create two MDPs. Portfolio number one has no short-sale restrictions. Portfolio number two has a long-only constraint. The performances of the MDPs are compared to each other, a cap-weighted benchmark and an equally-weighted portfolio in the period 2000-2012. I show that the MDPs have higher Sharpe ratios and are more diversified than the cap-weighted portfolio and the equally-weighted portfolio, when we look at the total period. However, when the annualized Sharpe ratio is calculated each year, the MDPs deliver substantially lower Sharpe ratios in 2001 and 2008-2012 compared to the cap-weighted benchmark and the equally-weighted portfolio. All four portfolios show lower Sharpe ratios in these periods due to the dot-com bubble that burst in the beginning of 2000, and the financial crisis that hit the global economy in 2008. In the period 2000-2012, the MDPs deliver lower Sharpe ratios in recessions and superior Sharpe ratios in economic upturns.
Beskrivelse
Masteroppgave i økonomi og administrasjon - Universitetet i Agder 2013