Diversification of investment decisions on the stock market: modeling and analysis

Abstract

Purpose: the authors show the possibility of applying the econometric multiple choice model with a discrete dependent variable in portfolio investment to increase the level of diversification. Discussion: the authors consider the possibility of studying the market interaction of financial assets using a multiple choice model. The authors offer to use the probabilistic structure of possible options for the assets interaction for analyze the level of diversification. The writers suggest to calculate the paired levels of diversification matrix on the basis of probabilities and with its help determine the ranks of assets diversification included in the portfolio. A numerical example shows the preference of the portfolio, which includes a high level of diversification. Results: the authors found that the proposed method of diversification provides the construction of portfolios with more stable dynamics of profitability to expected risk fluctuations.