In a prior
debate we had the discussion of diversification came up.
Im still trying to understand the position you've taken here as this seems to evade all the logic in my head. I recently had a similar debate with my roommate, a CFA in training, who takes the same position as you but he has thus far failed to do a satisfactory job of defending the theory.
Can you please try explain to me where my reasoning is wrong specifically? I know you already gave some reasoning but i dont understand how that proved the thesis that through portfolio management, owning multiple assets will increase returns without increasing risk or will decrease risk without sacrificing returns compared to choosing the most optimal single investment in the portfolio.
Here is why i think this is impossible. If you have two possible investments, regardless of structure, and their sharpe ratios are different from one another, then one asset must have a better sharpe ratio than the other.
If this is so, the only way combining these assets can improve risk to performance is if you compare the worse of the two assets to the combination of the two assets. However, if you compare the other way around you will see that is better to use limited funds towards only the best of the basket.
Im not against diversification but i think the reasons for doing so should be clear:
-Minimize risk
at the expense of returns.
-Isolate exposure