Open AccessThe Diversification Delta: A Different Perspective
Author(s) -
Yuri Salazar Flores,
Robert J. Bianchi,
Michael E. Drew,
Stefan Trück
Publication year - 2017
Publication title -
the journal of portfolio management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.914
H-Index - 50
eISSN - 2168-8656
pISSN - 0095-4918
DOI - 10.3905/jpm.2017.43.4.112
Subject(s) - kurtosis , diversification (marketing strategy) , skewness , portfolio , econometrics , portfolio optimization , entropy (arrow of time) , measure (data warehouse) , economics , computer science , financial economics , mathematical economics , mathematics , statistics , data mining , physics , business , marketing , quantum mechanics
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.Full Tex
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