In the absence of information, 1/n investment makes perfect sense

When people have several possible investment instruments, people often invest equally into these instruments: in the case of n instruments, they invest 1/n of their money into each of these instruments. Of course, if additional information about each instrument is available, this 1/n investment strategy is not optimal. We show, however, that in the absence of reliable information, 1/n investment is indeed the best strategy. 1 1/n Investment: Formulation of the Problem General investment problem. People saving for retirement usually have several options to invest: they can invest in stocks, they can invest in bonds, they can invest in funds that combine stocks and bonds, etc. An important decision is how to allocate money between different financial instruments, i.e., how much money should we invest in each of the instruments. Markowitz’s solution. A solution to this problem was proposed in 1952 by the future Nobelist H. M. Markowitz [4]. He actually solved two different versions of the investment problem: • the first version is when we want to achieve a certain expected growth rate, and within this expected rate, we select an investment portfolio that minimizes the risk (as measured by the standard deviation of the growth rate); • the second version is when we fix the risk level, and within this risk level, we select an investment portfolio that maximizes the expected growth rate. What is 1/n investment. In the absence of reliable information, people tend to divide their investment amount equally between different investment options: