Portfolio Diversification: How to Potentially Gain Better Returns per Unit of Risk

7 min read

This research article analyzes the impact of portfolio diversification when applied to a portfolio of stocks and bonds. In particular, it shows that by spreading the investment on uncorrelated asset classes an investor may achieve a higher return per unit of risk taken (Sharpe ratio). The article is structured as follows. The first section introduces the concept of portfolio diversification through Markowitz Portfolio Theory (MPT). The second section shows how portfolio diversification applies to traditional asset classes like equities and bonds by building an efficient frontier where an investor can choose his desired portfolio in terms of risk and return…....

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Andrea Leccese Andrea is President at Bluesky Capital, a quantitative investment management firm deploying capital in the global financial markets on behalf of individual and institutional investors. Prior to founding Bluesky Capital, Andrea worked as a Quant at Sauma Capital, a quantitative hedge fund in New York, and as a management consultant at Ernst & Young. Andrea holds an M.S. in Financial Engineering from Columbia University, and an M.S. in Industrial Engineering from the University of Rome "La Sapienza". He is a member of Mensa, “The International High IQ Society”.