Min k-Cut for Asset Selection in Risk-Based Portfolio Strategies

Risk-based portfolio strategies such as the equal-weighted, the minimum variance, and the risk parity portfolios vie to find portfolios that are well diversified according to their respective measures. In this chapter, we propose asset-selected risk-based portfolio strat- egies that aim to reduce the two known weaknesses of these strategies, namely the large portfolio size and poor diversification with respect to other measures. We formulate this task as a minimum k-cut problem through which we establish asset selection from all assets in the investable universe before the risk-based strategy is applied. Empirical results on the data sets of the S&P 500 and the KOSPI 200 indicate that our asset-selected risk-based portfolio strategies possess superior properties across extensive performance mea- sures compared to the baseline risk-based strategies. strategies show, sometimes significant, advantages across various performance measures compared to the baseline risk-based strategies.