The Diversification Delta: A Higher-Moment
Measure for Portfolio Diversification

Abstract

The concept of diversification is central in finance and has become even more so since the 2008 financial crisis. In this article, the authors introduce a new measure for diversification. The measure, referred to as “diversification delta,” is nonparametric, based on higher moments, easily interpretable due to its mathematical formulation, and incorporates the advantages of the present measures of diversification while extending them. The measure is applied to infrastructure returns data in order to understand the benefits of diversifying across various infrastructure classes, gaining useful insights for infrastructure fund managers and investors.

TOPICS: Portfolio theory, statistical methods, project finance