PT  - JOURNAL ARTICLE
AU  - Yuri Salazar Flores
AU  - Robert J. Bianchi
AU  - Michael E. Drew
AU  - Stefan Trück
TI  - The Diversification Delta: <em>A Different Perspective</em>
AID  - 10.3905/jpm.2017.43.4.112
DP  - 2017 Jul 31
TA  - The Journal of Portfolio Management
PG  - 112--124
VI  - 43
IP  - 4
4099  - https://pm-research.com/content/43/4/112.short
4100  - https://pm-research.com/content/43/4/112.full
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