Managing diversification

Attilio Meucci introduces a diversification index that represents the effective number of bets in a portfolio. With this index, based on entropy and constrained principal component analysis, he performs mean-diversification management adjusted for transaction costs using a parsimonious set of optimal trades

The qualitative definition of diversification is very clear to portfolio managers: a portfolio is well diversified if it is not heavily exposed to individual shocks. However, oddly enough, there exists no broadly accepted, unique, satisfactory methodology to precisely quantify and manage diversification.

In the special case of systematic-plus-idiosyncratic factor models, diversification is measured as the percentage of risk explained by the systematic factors. However, 'idiosyncratic' shocks are

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

Most read articles loading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here