MVO: concentrated assets

Hi guys.

Do I understand correctly, that MVO leads to concentrated asset allocations, and this concentration is due to the fact that MVO is seeking the highest return assets, so it will concentrate the allocation to those assets?

Because this is in contradiction to the fact that MVO is also based on diversification… which means, concentration should not be an issue (though I know it is, because that is one of the MVO criticisms). How would you reconcile this? Thanks!!

MVO is based on EF. EF not necessarily be most diversified. The derivation of MVO is based on Linear Programming, which says Maximise return, given sigma(risk). We may put certain constraints as well. Get it ? No? I know I am not making sense much . But leave aside the dry mathematics and just focus on the following:

  1. MVO is based on diversified asset classes, not necessarily diversified Industries , right ? So a commodity company’s equity as well as FI both can feature, at least theoritically on the same EF. Is not so ?

  2. MVO is programmed to seek maximum return. Return on the right side of the frontier gets fewer and fewer as you move, indicating greater weight to a particular type of asset class and industry.

Hope the above helps

Yes! :slight_smile: got it, thank you!!