Novel Risk Measures for Portfolio Optimization Using Equal-Correlation Portfolio Strategy

ArXiv ID: 2508.03704 “View on arXiv”

Authors: Biswarup Chakraborty

Abstract

Portfolio optimization has long been dominated by covariance-based strategies, such as the Markowitz Mean-Variance framework. However, these approaches often fail to ensure a balanced risk structure across assets, leading to concentration in a few securities. In this paper, we introduce novel risk measures grounded in the equal-correlation portfolio strategy, aiming to construct portfolios where each asset maintains an equal correlation with the overall portfolio return. We formulate a mathematical optimization framework that explicitly controls portfolio-wide correlation while preserving desirable risk-return trade-offs. The proposed models are empirically validated using historical stock market data. Our findings show that portfolios constructed via this approach demonstrate superior risk diversification and more stable returns under diverse market conditions. This methodology offers a compelling alternative to conventional diversification techniques and holds practical relevance for institutional investors, asset managers, and quantitative trading strategies.

Keywords: Portfolio Optimization, Equal-Correlation Strategy, Risk Diversification, Markowitz Mean-Variance, Quantitative Finance

Complexity vs Empirical Score

  • Math Complexity: 8.5/10
  • Empirical Rigor: 6.0/10
  • Quadrant: Holy Grail
  • Why: The paper presents advanced mathematical derivations for novel risk measures based on equal-correlation portfolios, including shrinkage estimation and matrix operations, while also providing a backtest-ready implementation using historical S&P 500 data from 2009-2019 with specific performance metrics.
  flowchart TD
    A["Research Goal<br>Develop Novel Risk Measures<br>for Portfolio Optimization"] --> B["Methodology<br>Equal-Correlation Strategy Formulation"]
    B --> C["Data & Inputs<br>Historical Stock Market Data"]
    C --> D["Computation<br>Optimization &<br>Empirical Validation"]
    D --> E["Findings<br>Superior Risk Diversification<br>Stable Returns Across Markets"]