# On robust portfolio and naïve diversification: mixing ambiguous and unambiguous assets

On robust portfolio and naïve diversification: mixing ambiguous and unambiguous assets Effect of the availability of a riskless asset on the performance of naïve diversification strategies has been a controversial issue. Defining an investment environment containing both ambiguous and unambiguous assets, we investigate the performance of naïve diversification over ambiguous assets. For the ambiguous assets, returns follow a multivariate distribution involving distributional uncertainty. A nominal distribution estimate is assumed to exist, and the actual distribution is considered to be within a ball around this nominal distribution. Complete information is assumed for the return distribution of unambiguous assets. As the radius of uncertainty increases, the optimal choice on ambiguous assets is shown to converge to the uniform portfolio with equal weights on each asset. The tendency of the investor to avoid ambiguous assets in response to increasing uncertainty is proven, with a shift towards unambiguous assets. With an application on the $$\textit{CVaR}$$ CVaR risk measure, we derive rules for optimally combining uniform ambiguous portfolio with the unambiguous assets. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Annals of Operations Research Springer Journals

# On robust portfolio and naïve diversification: mixing ambiguous and unambiguous assets

, Volume 266 (2) – Aug 29, 2017
31 pages

/lp/springer_journal/on-robust-portfolio-and-na-ve-diversification-mixing-ambiguous-and-4oedn05vry
Publisher
Springer Journals
Subject
Business and Management; Operations Research/Decision Theory; Combinatorics; Theory of Computation
ISSN
0254-5330
eISSN
1572-9338
D.O.I.
10.1007/s10479-017-2619-8
Publisher site
See Article on Publisher Site

### Abstract

Effect of the availability of a riskless asset on the performance of naïve diversification strategies has been a controversial issue. Defining an investment environment containing both ambiguous and unambiguous assets, we investigate the performance of naïve diversification over ambiguous assets. For the ambiguous assets, returns follow a multivariate distribution involving distributional uncertainty. A nominal distribution estimate is assumed to exist, and the actual distribution is considered to be within a ball around this nominal distribution. Complete information is assumed for the return distribution of unambiguous assets. As the radius of uncertainty increases, the optimal choice on ambiguous assets is shown to converge to the uniform portfolio with equal weights on each asset. The tendency of the investor to avoid ambiguous assets in response to increasing uncertainty is proven, with a shift towards unambiguous assets. With an application on the $$\textit{CVaR}$$ CVaR risk measure, we derive rules for optimally combining uniform ambiguous portfolio with the unambiguous assets.

### Journal

Annals of Operations ResearchSpringer Journals

Published: Aug 29, 2017

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