Home / Ideas / Minimum-Variance / Maximum-Diversification
Minimum-Variance / Maximum-Diversification
realized-covariance optimizer that minimizes total portfolio vol
The lowest-vol end of the risk-based spectrum: minimizing portfolio variance (or maximizing the diversification ratio) posted the highest gross Sharpe in QuantPedia's survey (Max-Diversification 1.23, with the smallest drawdown) by leaning into low-vol, low-correlation diversifiers — a natural complement to trend/momentum sleeves in a defensive tilt.
Universe
Same cross-asset ETF sleeve as ideas 1/3 (SPY/EFA/IEF/TLT/GLD/DBC), long-only with per-asset weight caps to control concentration.
How it works
Each month estimate the 126-day realized covariance, solve the long-only global-minimum-variance (or maximum-diversification) problem with a per-name weight cap (e.g. 40%), rebalance monthly with a one-day lag.
Expected performance
Research-derived Sharpe estimate: 0.5–1.0.
Backtest this idea with SignalChain
This is a research lead — not a finished backtest. SignalChain takes an idea like this and runs the whole pipeline inside Claude Code: it researches the concept against academic and practitioner sources, sets benchmarks, writes and lints a VectorBT backtest, runs it, and grades the result PASS/FAIL. One command:
/signalchain minimum-variance allocation on SPY EFA IEF TLT GLD DBC using 126d realized covariance, long-only, 40% per-asset cap, monthly rebalance, one-day lag
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Research & sources
- quantpedia.com — quantpedia.com
- investresolve.com — investresolve.com
More Risk-managed & volatility-targeted allocation ideas
Not financial advice. This page describes a research idea, not a recommendation. Any performance figures are hypothetical, research-derived estimates and are not indicative of future results. SignalChain is a research and educational tool; you are solely responsible for any decisions you make.