Portfolio Risk Optimisation and Diversification Using Swarm Intelligence

Abstract

The ongoing global economic turmoil has got the asset management industry look into new ways of financial risk management. Portfolio optimisation and risk budgeting are at the heart of most computational finance studies by academics and practitioners. In this paper, we introduce and analyse a method to construct an equity portfolio based on decomposition of marginal asset risk contribution of each stock in a given universe and then formulate a diversification problem for unsystematic risk as an optimisation problem. We have illustrated the performance of our method by comparing with another diversification technique, known as the Risk Parity portfolio, and then benchmark our results against the global major indices.