Portfolio weights concentration: optimal strategies and equilibrium implications

Abstract

Purpose

The purpose of this article is to help investors build less-concentrated portfolios as well as to construct optimal return-concentration portfolios.

Design/methodology/approach

An alternative portfolio objective is proposed where investors care about the level of concentration of their portfolio weights. Minimizing the concentration of portfolio weights leads to the well-known equal-weight portfolio as the optimal choice. Maximizing the trade-off between the portfolio's expected return and the weight concentration produces a novel portfolio with weights proportional to the expected return of each security.

Findings

An empirical application with 30 industry portfolios and 1,000 individual stocks finds that both proposed strategies perform well out-of-sample both in terms of the proposed concentration measure but also in terms of more traditional risk-based measures like Sharpe ratios, abnormal returns and market betas.

Originality/value

The optimal risk-concentration portfolio proposed in this paper is a novel result. The portfolio generalizes prior practitioner intuition on focusing on securities with the highest expected returns and the concept of diversification.

Citation

Glabadanidis, P. (2023), "Portfolio weights concentration: optimal strategies and equilibrium implications", International Journal of Managerial Finance, Vol. 19 No. 3, pp. 572-582. https://doi.org/10.1108/IJMF-03-2022-0098