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The Diversification Delta: A Different Perspective

Yuri Salazar Flores, Robert J. Bianchi, Michael E. Drew and Stefan Trück
The Journal of Portfolio Management Summer 2017, 43 (4) 112-124; DOI: https://doi.org/10.3905/jpm.2017.43.4.112
Yuri Salazar Flores
is a lecturer in the Faculty of Sciences at National Autonomous University of Mexico in Mexico City, Mexico
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Robert J. Bianchi
is an associate professor in the Griffith Business School and director of the Griffith Centre for Personal Finance and Superannuation at Griffith University in Brisbane, QLD, Australia
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Michael E. Drew
is a professor in the Griffith Business School at Griffith University in Brisbane, QLD, Australia
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Stefan Trück
is a professor of finance and co-director of the Centre for Financial Risk at Macquarie University in Sydney, NSW, Australia. stefan.trueck@mq.edu.au
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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.

TOPICS: Portfolio theory, statistical methods

  • © 2017 Institutional Investor, LLC
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The Journal of Portfolio Management: 43 (4)
The Journal of Portfolio Management
Vol. 43, Issue 4
Summer 2017
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The Diversification Delta: A Different Perspective
Yuri Salazar Flores, Robert J. Bianchi, Michael E. Drew, Stefan Trück
The Journal of Portfolio Management Jul 2017, 43 (4) 112-124; DOI: 10.3905/jpm.2017.43.4.112

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The Diversification Delta: A Different Perspective
Yuri Salazar Flores, Robert J. Bianchi, Michael E. Drew, Stefan Trück
The Journal of Portfolio Management Jul 2017, 43 (4) 112-124; DOI: 10.3905/jpm.2017.43.4.112
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  • Article
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    • THE DIVERSIFICATION DELTA
    • A REVISED DIVERSIFICATION DELTA (DD*) MEASURE
    • CONCLUSION
    • ENDNOTES
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