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 strategies 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 measures compared to the baseline risk-based strategies.
Part of the book: Artificial Intelligence