“Optimal Versus Naive Diversification: How Inefficient Is the 1/N Portfolio Strategy” †a Critique

Optimal Versus Naive variegation How Inefficient Is The 1/N Portfolio Strategy A Critique en epithet The title of the stem Optimal Versus Naive Diversification How Inefficient Is The 1/N Portfolio Strategy has been reasonably well phrased.However, it can be argued that the title is a little misleading as the principal objective of the paper is to test how efficient different optimal diversification strategies ar utilize the 1/N portfolio strategy as the benchmark and not to discipline and elucidate the merits of the 1/N strategy, which the authors be certainly neither advocating for practical(a) purposes nor seemingly seeking to foster greater intellectual attention on the simplistic strategy. The title could have simply been How Efficient Really argon Todays Optimal Diversification Strategies? But, care has to be taken before coming to the above resultant that the authors competency have appreciably so, intentionally used the title they have in order to pass further atte ntion to their paper by stressing the obvious irony and realistic iconoclasm in their conclusions. Abstract The abstract has been very well written. It captures the essence of the shoot and conveys the crux of it lucidly to the reader. However, it would have augured better to start the abstract by stating the objective of the discipline in addition to it being menti atomic number 53d in the textual matter of the article just as the authors have.That way, the abstract would have had greater clarity. penury The inherent pauperization behind the study is laud fit and the implied motivation derived from the conclusion is obvious. However, the motivation itself has unfortunately not been sufficiently expressed. Apart from a one- objurgate objective, nothing else has been explicitly written about why the study was undertaken. There is one some other sentence, which could be construed as the motivation. But, the authors themselves have not given the sentence the same attribute. The sentence itself is a reference to a revious study that ready that many investors used the 1/N diversification strategy ignoring some(prenominal) other sophisticated theoretical models and is stated to only justify their utilization of the 1/N diversification strategy as the benchmark. It could have been exposit upon with additional related facts and further evidence supported by literature. Also, a separate paragraph with a heading called Motivation would be loveable to the readers. Introduction The topic covered by the article has been adequately introduced. The design description of the various plus allocation models and how they are related to severally other is commendable.The introduction has alike carefully introduced the methodology, the observations and the results and the conclusions in a synthetic and concise manner such that readers might understand the study by just reading this part. However, the literature on the Bayesian and non-Bayesian approaches has on ly been before long mentioned in one paragraph. Considering how significant the contribution of the stated articles to the current study might be, it would have only been fitting to include a contribution called Literature Review elaborating on them substantially more than the authors have.That way, they could have been able to make a clearer connection on how the previous studies relate to the motivation and methodology of their study. However, it should be notable that word limits might have been a constraint. In addition, the introduction must be a definite persona that is called Introduction. Methodology The authors have adopted a robust methodology to evaluate the performance of the diversification strategies discussed. They have been explained in great distributor point with sufficient appendices in an easily understandable format.There is not much range for improvement in the methodology and the authors must be greatly appreciated for it. Data The data has been obtained from highly reliable sources, thereby implying that there is just any margin for error in the data. No bias or subjectivity is evident. The data has been properly classified and well presented. Results With well-defined methodology and credible sources, the results of the study are factually accurate even though it can be argued that conclusions from the same are a function of their recitation just as in every other study. However, there is a drawback concerning the same.The authors have only limited themselves to comparing the performance of models of optimal asset allocation that consider moments of asset returns and not other characteristics of the assets. The authors could have include a section within the discussion of their results in which they could have compared their results with that of other similar studies, even if they involved the analysis of fewer diversification strategies, and desire to establish a reasoning behind how the possible differences between the result s of the studies might be related to variations in their respective methodologies or data.They could have also sought to describe how their study and the underlying methodology have helped have the best previous voids in relevant literature. It might have even been well(predicate) to express why their study is more accurate and hence top-flight to the others if they did think so. In case the study was known, to their knowledge to be new and unrelated to any comparative study of portfolio diversification strategies, it should have been explicitly stated as the reason why the above-said was not done.But, it has to be noted that the authors have indeed done the above-said, but only with respect to twain of their important assumptions, i. e. , Brandt et al (2007)s approach to constructing the optimal portfolio using cross-sectional characteristics of equity returns and the dynamic asset allocation models of Campbell and Viciera (1999 2001) and Campbell et al (2003). Conclusions Th e conclusions of the study are definitely iconoclastic and have huge repercussions for the research community.It points out how uneconomical the numerous theoretical models that have been developed on portfolio diversification are clearly indicates that an enormous amount of research has to be undertaken to address this solid shortcoming. The conclusions have been expressed concisely and the limitations of the study have been stated. Their recommendation on the direction for further research is well thought out and reassert by their findings and is hence highly commendable.