Speaker: Giuzio Margherita, ECB
Abstract: High levels of correlation among ﬁnancial assets and extreme losses are typical during crises. In such
situations, investing in few assets might be a better choice than holding diversiﬁed portfolios. We show that
constraining the sparse `q-norm of portfolio weights automatically controls diversiﬁcation and selects portfolios
with a small number of active weights and low risk, in presence of high correlation and volatility. We high
light the diversiﬁcation relationships between the minimum variance portfolio, risk budgeting strategies and
diversiﬁcation-constrained portfolios. Finally, we show empirically that the `q-strategy can successfully cope
with bear markets by shrinking portfolio weights and total amount of shorting.