11. Diversification Reconsidered

  1. Bernhard Pfaff

Published Online: 30 OCT 2012

DOI: 10.1002/9781118477144.ch11

Financial Risk Modelling and Portfolio Optimization with R

Financial Risk Modelling and Portfolio Optimization with R

How to Cite

Pfaff, B. (2012) Diversification Reconsidered, in Financial Risk Modelling and Portfolio Optimization with R, John Wiley & Sons, Ltd, Chichester, UK. doi: 10.1002/9781118477144.ch11

Author Information

  1. Invesco Global Strategies, Germany

Publication History

  1. Published Online: 30 OCT 2012
  2. Published Print: 28 DEC 2012

ISBN Information

Print ISBN: 9780470978702

Online ISBN: 9781118477144



  • portfolio optimization;
  • R packages;
  • risk diversification;
  • tail-dependent portfolio


This chapter presents the approaches to portfolio optimization that directly addresses the issue of asset allocation such that the purpose of risk diversification is directly taken into account. It discusses how to measure the degree of diversification and how to determine a portfolio allocation such that it is ‘most diversified’. Then, the chapter discusses the charatcterization of ‘diversification’ by the contribution of the portfolio’s constituent assets to the overall portfolio risk. The chapter also discusses the diversification when optimal tail-(in)dependent portfolios are constructed. It also presents the R packages in which the portfolio optimization approaches either are directly implemented or can be employed for optimization. The chapter concludes with examples in which the solutions of the most diversified, the equal-risk contributed and the minimum tail-dependent portfolio approaches are contrasted with the allocation of the global-minimum variance portfolio.

Controlled Vocabulary Terms