The diversification delta: A different perspective
MetadataShow full item record
In a 2012 article published in The Journal of Portfolio Management, Vermorken, Medda, and Schröder introduce a new measure of diversification, the Diversification Delta (DD), based on the entropy of the portfolio return distribution. Entropy as a measure of uncertainty has been used successfully in several frameworks and takes into account the entire statistical distribution, rather than just the first two moments. In this article, the authors highlight some drawbacks of the DD measure and go on to propose an alternative measure based on exponential entropy that overcomes the identified shortcomings. The authors present the properties of this new measure and propose it as an alternative for portfolio optimization that incorporates higher moments of asset returns, such as skewness and excess kurtosis.
Journal of Portfolio Management
© 2017 Institutional Investor. This is the author-manuscript version of this paper. Reproduced in accordance with the copyright policy of the publisher. Please refer to the journal's website for access to the definitive, published version.
Banking, Finance and Investment not elsewhere classified