An analysis of the performance of the "1/n” naïve portfolio strategy in Korean stock markets

Abstract

In this study, we compare three measurements of 12 asset-allocation strategies to a "1/N” portfolio using historical data of Korean stock markets, which is a representative emerging market, from January 2000 to December 2015. We find that in Korean stock markets the asset allocation strategies with short sale constraint have better performance than the "1/N” portfolio (i.e., high Sharpe ratios and high certainty-equivalent returns). While these optimal asset-allocation models have higher turnover than the "1/N” portfolio, the Sharpe ratio of short sale constraint is still higher than the "1/N” portfolio when we consider transaction costs. The results are surprising because no asset-allocation strategies are consistently dominant on "1/N” portfolio using US stock market data.