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Do optimal diversification strategies outperform the 1/N strategy in U.K. stock returns

Fletcher, Jonathan (2011) Do optimal diversification strategies outperform the 1/N strategy in U.K. stock returns. International Review of Financial Analysis, 20 (5). 375–385. ISSN 1057-5219

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Abstract

This paper examines whether optimal diversification strategies outperform the 1/N strategy in U.K. stock returns. The study focuses on the performance of recent strategies developed by Tu and Zhou(2011) and Kirby and Ostdiek(2010). I find that a number of optimal asset allocation strategies can significantly outperform the 1/N strategy even after adjusting for trading costs. The strategies developed by Kirby and Ostdiek outperform the 1/N strategy, even at higher trading costs, due to the low turnover of these strategies. The strategies of Tu and Zhou have mixed performance after adjusting for trading costs due to the high turnover of these strategies. The results of the paper provide support for the use of optimal diversification strategies.