Published in the Journal of Empirical Finance

Abstract

We examine how active risk- and holdings-based diversification of equity portfolios affect performance and vulnerability to large losses. Conducting a comprehensive empirical study of US-based funds, we find that risk-based and sector-based diversification significantly reduce active tail risk and the likelihood of extreme losses, without substantially diminishing portfolio performance. These effects are nonlinear and decreasing, suggesting that investors need not minimizing the concentration of their portfolios. We also examine these relationships on an unprecedented large sample of portfolios using a novel methodology that allows the production of portfolios with similar levels of risk, and find that they are robust to several definitions of extreme risk. Our results highlight the practical value of diversification in managing portfolio risk while maintaining competitive performance.

Key takeaways

• Risk-based and sector-based diversification mitigate large portfolio losses.
• Risk-based diversification outperforms other diversification measures in reducing tail risk.
• The marginal benefits of diversification are decreasing: minimizing concentration is not necessary.
• Mitigation effects of risk diversification do not depend on active risk levels.

Authors

Benoit Vaucher
Director of Research,
Scientific Portfolio

Matteo Bagnara, PhD
Quant Researcher,
Scientific Portfolio ……………………………………….

Read the full Whitepaper

"*" indicates required fields

Name*

First Name Last Name

Company Email*

Phone Number

Company Name*

Organization Type*

Select your organization typeAsset ManagerBanks & Capital MarketsInstitutional InvestorWealth ManagerRegulators & Public BodiesConsultantsMediaAcademicsOthers

Job Title*

Country*

Select your countryArgentinaAustraliaAustriaAzerbaijanBelgiumBoliviaBrazilBulgariaCanadaChileChinaColombiaCosta RicaCroatiaCyprusCzech RepublicDenmarkEstoniaFinlandFranceGermanyGreeceGuernseyHong KongHungaryIcelandIndiaIrelandIsraelItalyJapanJerseyKuwaitLatviaLiechtensteinLithuaniaLuxembourgMalaysiaMexicoMonacoNetherlandsNew ZealandNigeriaNorwayPeruPhilippinesPolandPortugalQatarRomaniaSaudi ArabiaSingaporeSlovakiaSloveniaSouth AfricaSouth KoreaSpainSwedenSwitzerlandTaiwanThailandUnited Arab EmiratesUnited States of AmericaOther

City

Choices*

I acknowledge that Scientific Portfolio will process my personal information in accordance with its Privacy Policy. I can opt out from Scientific Portfolio’s marketing emails at any time by clicking an unsubscribe link.

https://scientificportfolio.com/wp-content/uploads/2025/09/Climate-Equity-Performance-Needs-Close-Attention.pdf

Access the Whitepaper