RT Journal Article
SR Electronic
T1 The Diversification Delta: <em>A Different Perspective</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 112
OP 124
DO 10.3905/jpm.2017.43.4.112
VO 43
IS 4
A1 Yuri Salazar Flores
A1 Robert J. Bianchi
A1 Michael E. Drew
A1 Stefan Trück
YR 2017
UL https://pm-research.com/content/43/4/112.abstract
AB 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