The Trifecta to Maximize Investment Returns and Minimize Risks: Volume-Weighted-Average-Price, Diversification and Dividend-Re-Investment-Policy Volume 60- Issue 4

Samique March-Dallas*

• Department of Accounting, Finance, and Business Law, School of Business and Industry, Florida A&M University, USA

Received: February 08, 2025; Published: February 20, 2025

*Corresponding author: Samique March-Dallas, Department of Accounting, Finance, and Business Law, School of Business and Industry, Florida A&M University, Tallahassee, Florida 32307, USA

DOI: 10.26717/BJSTR.2025.60.009481

Abstract PDF

This article examines three fundamental strategies for optimizing investment returns while managing risk: Volume-Weighted-Average-Price (VWAP), portfolio diversification, and dividend-reinvestment-policy (DRIP) investing. We belief that portfolio optimization is realized using these strategies, when combined, to create a robust framework for investment decision-making that can enhance returns while providing downside protection across various market conditions.

Abbreviations: VWAP: Volume-Weighted-Average-Price; DRIP: Dividend-Reinvestment-Policy

In today’s complex financial markets, investors face the perpetual challenge of maximizing returns while managing risk exposure. Traditional investment strategies typically focus on diversification as the single means to maximize Investment outcomes. However, diversification focuses on risk minimization while investment optimization should focus on both risk minimization and return maximization. Return is a combination of capital gains and income. Capital gains is a factor of investment timing and time horizon. DRIP investing utilizes the income return for compounding benefits to maximize return. VWAP execution combines investment timing over the investment time horizon to impact the price return. Price return is computed as a comparison between ending price and beginning price so using VWAP to optimize the price comparison results in an optimized return. Investment optimization should include complementary strategies such as VWAP, diversification and DRIP. This paper presents evidence supporting the effectiveness of combining three distinct but complementary investment strategies: VWAP execution, portfolio diversification, and dividend investing. We argue that this trifecta approach provides a comprehensive framework for building and managing investment portfolios.

Volume-Weighted-Average-Price (VWAP)

Previous research demonstrates that VWAP-based execution strategies can reduce trading costs compared to traditional market orders and helps to minimize market impact and timing risk (Ting, et al. [1,2]). Algorithmic trading systems utilizing VWAP benchmarks achieved superior price execution in majority of cases compared to discretionary trading methods (Crane, et al [3-6]).

Portfolio Diversification

Properly diversified portfolios reduced volatility while maintaining comparable returns to concentrated portfolios over defined time horizons. Cross-asset diversification provided significant downside protection during market stress events, with diversified portfolios experiencing less drawdown during crisis periods. International diversification continues to offer substantial benefits despite increased global market correlation, particularly when including emerging market exposure.

Dividend Investing

Dividend-paying stocks outperformed non-dividend paying peers annually with lower volatility. Companies maintaining consistent dividend policies demonstrated superior earnings quality and lower incidence of financial distress. Dividend growth rates served as reliable predictors of future earnings growth, with companies increasing dividends showing higher probability of sustained earnings growth. Investors who want to optimize their investment portfolios want to focus on:

1. VWAP execution efficiency across market capitalizations 2. Diversification benefits across different asset classes 3. Dividend contribution to total return and risk reduction

Portfolios implementing all three strategies will outperform single- strategy approaches by a significant margin over multiple market cycles as this approach is holistic in addressing portfolio composition. The synergistic effects of combining VWAP execution, diversification, and dividend investing create a robust investment framework that addresses multiple aspects of portfolio management:

1. VWAP minimizes execution costs and timing risk 2. Diversification reduces portfolio-specific risk 3. Dividends provide steady income and downside protection

The evidence strongly suggests that implementing these three strategies in concert provides superior risk-adjusted returns compared to single-strategy approaches. Future research should focus on optimizing the interaction between these strategies across different market conditions and investor objectives.

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