Correspondence: David King, Investment Risk Group, Schroder Investment Management, 31 Gresham Street, London EC2V 7QA, UK. Tel: +44 020 7658 7675; Fax +44 020 7658 2836; E-mail: david.king@schroders.com

¹holds a BSc in Mathematics (1986) and an MSc in Mathematics (1987), both from the University of Warwick. His investment career commenced in 1989 and he has worked in a variety of roles covering both quantitative analysis and risk analysis and has also managed both active and passive portfolios. He is currently Head of Investment Risk at Schroder Investment Management.

Received 25 September 2007; Revised 25 September 2007.

Abstract

Portfolio optimisation can produce overly concentrated portfolios that both practitioners and clients may find difficult to accept. This paper shows, through adjustments to the objective function, how to alter levels of portfolio diversification using the same quadratic programming methodology used in the standard portfolio optimisation process. The ideas can be extended to target differential levels of diversification at multiple levels of asset categorisation and can thus be used in a variety of settings.