The Diversification Delta: a different perspective

Yuri Salazar Flores, Robert J. Bianchi, Michael E. Drew, Stefan Trück

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)112-124
Number of pages13
JournalJournal of Portfolio Management
Volume43
Issue number4
DOIs
Publication statusPublished - 1 Jun 2017

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