I've often wondered about the 1/n strategy. It's simple enough: invest in n assets equally, and rebalance them regularly.
However, there are some questions: how does one know which n assets to pick? Should they be mostly decorrelated? How decorrelated? And shouldn't all n assets have > 50% probability of growth? And what should the number n be? These aren't always easy questions to answer. After all, you could pick n dud assets that are highly correlated, and the strategy would fail.
I'm curious: how do folks apply the 1/n strategy in practice?
1- Alpha prediction (forecasting a return for each asset)
2- Portfolio Construction
3- Portfolio realization - trading
I was referring to problem #2, which assumes you have a priori alpha forecasts and the relative confidence of those forecasts. In the general portfolio construction problem, the past mean returns of stocks is taken to be the future return.
However, there are some questions: how does one know which n assets to pick? Should they be mostly decorrelated? How decorrelated? And shouldn't all n assets have > 50% probability of growth? And what should the number n be? These aren't always easy questions to answer. After all, you could pick n dud assets that are highly correlated, and the strategy would fail.
I'm curious: how do folks apply the 1/n strategy in practice?