Risk-Based Stock Portfolio Diversification and Rebalancing

Summary

This profile describes a student project that builds a diversified portfolio from 22 S&P 500 stocks across 11 sectors. The allocation is rebalanced quarterly using each stock’s standard deviation: higher-volatility stocks receive smaller weights, while lower-volatility stocks receive larger weights. The project also adds a benchmark hedge sized in proportion to the portfolio’s beta.

The author reports that during the COVID-19 period the portfolio had lower volatility, a better Sharpe ratio, and more resilient drawdowns than its benchmark, while failing to match the benchmark’s returns. These are reported outcomes from a single project, not independently documented tests in this account; no full methodology, comparison details, or transaction-cost analysis are supplied. The profile gives a useful outline of a risk-based allocation idea, but it does not establish that the approach will generalize to other periods or universes. Standard deviation alone may not capture all dimensions of portfolio risk, and the account does not specify the exact calculation or rebalancing implementation.

Key ideas

• The project diversifies across stocks from multiple S&P 500 sectors.
• Quarterly allocations are adjusted according to each holding’s standard deviation.
• Higher-volatility holdings receive smaller weights than less volatile holdings.
• A benchmark short is added in proportion to portfolio beta.
• The author reports reduced volatility and improved Sharpe ratio versus the benchmark, but lower returns.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.