The Diversification of Portfolios under Different Conventional Scenarios in the Shock of COVID-19

Abstract

Asset portfolio theory has traditionally been widely used in the financial field. Several studies have been made to demonstrate the superiority of this theory and many people have done many efforts to develop it. However, in the last two years, various industries have been hit by the COVID-19, and this paper is designed to investigate whether the asset portfolio still has a good risk diversification ability under different constraints in this context. In this paper, a portfolio is constructed using stocks of 10 companies from 5 industries and the SPX index, and the Markowitz Model and Index Model are used to calculate the returns and standard deviations of the portfolio under the four constraints. As a result, the limitation of short selling to stocks will increase the risk and reduce the profitability of the portfolio somehow but a well-diversified portfolio can reach the most requirements in the market, and the inclusion of the broad index into the portfolio has positive effect, which means a better diversification and higher profitability. Consequently, it can be concluded that the portfolio still has good risk diversification even under the shock of the COVID-19. This research could facilitate the study of portfolio theory under several different scenarios as well as contribute to investors’ better understanding of the risk diversification.