Enhancing utility and diversifying model risk in a portfolio optimization framework

A method of selecting a portfolio comprising one or more financial products of an available set of financial products, the method comprising the steps of:

• determining an initial portfolio of financial products from an available set of financial products;
• considering the cost associated with a set of more diversified portfolios compared to the initial portfolio;
• and
• selecting a portfolio from the set of more diversified portfolios having an associated cost that is less than or equal to a predetermined diversity budget.

A method of selecting a portfolio comprising one or more mutual fund products of an available set of mutual fund products, the method comprising the steps of:

• determining an initial portfolio and a plurality of more diversified portfolios of mutual fund products from an available set of mutual fund products;
• determining a cost associated with each of the plurality of more diversified portfolios;
• and
• selecting a portfolio of the plurality of more diversified portfolios if the cost is less than or equal to a predetermined diversity budget.

A method of selecting a portfolio comprising one or more financial products of an available set of financial products, the method comprising the steps of:

• determining an initial portfolio of financial products from an available set of financial products;
• determining one or more alternate portfolios that are more diverse than the initial portfolio;
• measuring a cost associated with achieving diversity by comparing one or more characteristics of the initial portfolio and the one or more alternate portfolios;
• and
• selecting a portfolio of the one or more alternate portfolios if the cost is less than or equal to a predetermined diversity budget.

A method of selecting a recommended portfolio comprising one or more financial products of an available set of financial products, the method comprising the steps of:

• determining a first portfolio having a first expected return and associated with a first level of risk, the first portfolio comprising a utility maximizing combination of financial products from a set of available financial products in which the largest holding is limited to X% of the first portfolio;
• determining a more diverse portfolio having a second expected return and associated with the first level of risk, the more diverse portfolio comprising a utility maximizing combination of financial products from the set of available financial products in which the largest financial product holding is limited to Y% of the second portfolio, where Y<X;
• if the difference between the first expected return and the second expected return is less than a diversity budget, then selecting the more diverse portfolio as the recommended portfolio;
• otherwise selecting the first portfolio as the recommended portfolio.

A method of selecting a portfolio comprising one or more financial products of an available set of financial products, the method comprising the steps of:

• determining an initial portfolio and a plurality of more diversified portfolios of financial products from an available set of financial products;
• determining a cost associated with each of the plurality of more diversified portfolios;
• and
• selecting the most diversified portfolio of the more diversified portfolios having an associated cost that is less than or equal to a predetermined diversity budget.

A computer system comprising:

• a storage device having stored therein a portfolio optimization routine for simulating portfolio return scenarios for one or more portfolios including combinations of financial products from an available set of financial products;
• a processor coupled to the storage device for executing the portfolio optimization routine to select between an initial portfolio and a more diverse portfolio and evaluate a cost associated with implementing the more diverse portfolio rather than the initial portfolio, where:
• the initial portfolio is determined with a first maximum exposure constraint;
• the more diverse portfolio is determined by imposing a second maximum exposure constraint that limits holdings in any individual financial product of the available set of financial products to a lesser percentage than the first maximum exposure constraint;
• the cost reflects the difference between a first expected return associated with the initial portfolio and a second expected return associated with the more diverse portfolio;
• and
• the more diverse portfolio is selected over the initial portfolio if the cost is less than or equal to a predetermined diversity budget.

A machine-readable medium having stored thereon data representing sequences of instructions, the sequences of instructions which, when executed by a processor, cause the processor to perform the steps of:

• determining an initial portfolio and a plurality of more diversified portfolios of financial products from an available set of financial products;
• determining a cost associated with each of the plurality of more diversified portfolios;
• and
• selecting a portfolio of the plurality of more diversified portfolios if the cost is less than or equal to a predetermined diversity budget.

A data signal embodied in a propagation medium, the data signal including a plurality of instructions, which when executed by a processor, cause the processor to perform the steps of:

• determining an initial portfolio and a plurality of more diversified portfolios of financial products from an available set of financial products;
• determining a cost associated with each of the plurality of more diversified portfolios;
• and
• selecting a portfolio of the plurality of more diversified portfolios if the cost is less than or equal to a predetermined diversity budget.