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Exact Solution for the Portfolio Diversification Problem Based on Maximizing the Risk Adjusted Return

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Document pages: 8 pages

Abstract: The potential benefits of portfolio diversification have been known toinvestors for a long time. Markowitz (1952) suggested the seminal approach foroptimizing the portfolio problem based on finding the weights as budget sharesthat minimize the variance of the underlying portfolio. Hatemi-J and El-Khatib(2015) suggested finding the weights that will result in maximizing the riskadjusted return of the portfolio. This approach seems to be preferred by therational investors since it combines risk and return when the optimal budgetshares are sought for. The current paper provides a general solution for thisrisk adjusted return problem that can be utilized for any potential number ofassets that are included in the portfolio.

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