Concentration measures in portfolio management

Abstract

The allocation of wealth in an investment portfolio can be viewed as finding a proper weight allocation vector while obeying investment constraints and preferences, as risk aversion, expected returns, investment sector preferences and regulatory and/or preferential limits on allocation per stock. It is these constraints and preferences that make the stock (or wealth) allocation problem a multiple criteria problem. We link these allocations to the theory of inequality and related concentration measurements, focusing on weight concentration as an other criterion for investment portfolio management. In this paper, we will discuss the Gini and the Herfindhal concentration measures of weights and relate them to the portfolio allocation problem using a hypothetical investment portfolio. © 2012 Springer-Verlag.