Implementing and Assessing Diversification Strategies for Investment Portfolio Resilience
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Authors
Denegar, Andrew
Date of Issue
2025-04-25
Type
Presentation
Language
en_US
Subject Keywords
Other Titles
Investment Portfolio Management: A Financial Ratio Approach
Abstract
Many of us know that our investment portfolio should be diversified, but implementing and assessing this diversification is complex. In addition, a good portfolio is tuned to match the risk tolerance and individual needs of each unique investor.
To address these challenges we build portfolios based on industry and financial diversity as well as historical returns and volatility. We standardized key financial metrics (profitability, liquidity, efficiency, market value, and leverage) for each stock using robust scaling. These standardized scores indicate how each company’s financial metrics compare relative to peers. For instance, although Apple and Microsoft operate within similar industries, Microsoft’s liquidity score (1.2) shows it performs significantly above the median, while Apple’s liquidity (-0.3) falls below the typical level. However, Apple demonstrates superior efficiency (2.11 vs. 0.14) and market value (2.20 vs. 1.33), suggesting stronger operational performance and higher market valuation relative to Microsoft. Using these metrics we visualize differences using principal component analysis and cluster stocks using dendrogram and K-Means clustering. To build a diversified portfolio we select stocks from each cluster, making our selections based on a balance of expected risk and reward.
Our program builds a diversified portfolio tailored to an individual’s risk tolerance. With each recommendation we deliver unique insight into the qualities of each stock.