On the Diversity Constraints for Portfolio Optimization

In the literature, Markowitz’s mean-variance model and its variants have been shown to yield portfolios that put excessive weights on only a few assets. Many diversity constraints were proposed and added to these models to avoid such overly concentrated portfolios. However, since these diversity constraints are formulated differently, it becomes difficult to compare them and study their relationships. This paper proposes a canonical form for the commonly used diversity constraints in the literature, and shows how to transform these diversity constraints into this canonical form. Furthermore, this paper compares these diversity constraints (in the canonical form with the same upper bound) on their ability to shrink the feasible region of the portfolio optimization problem. The results show a subset relation among their feasible regions.