- Impact from asset correlation verified by assigning assets to risk groups (RG), with high (low) asset correlation within (between) groups.
- Results were compared with those using a random selection of assets all from different as well as the same risk group, indicating a degraded diversification benefit as the asset correlation increase.
- The diversification benefit is generally well represented by the number of portfolio assets, however, the effective number of independent assets can be significantly reduced by correlation.
- Similar reduction of effective 𝑁 of assets can be caused by capacity constraints, e.g. if main part of allocation assigned to contracts all belonging to crude oil complex.
(* Further details related to the asset risk groups used can be found in the research subject “controlling correlation”.)