Economy – Quantitative Finance – Portfolio Management
Scientific paper
2011-02-23
Economy
Quantitative Finance
Portfolio Management
9 pages, 7 figures
Scientific paper
In the market place, diversification reduces risk and provides protection against extreme events by ensuring that one is not overly exposed to individual occurrences. We argue that diversification is best measured by characteristics of the combined portfolio of assets and introduce a measure based on the information entropy of the probability distribution for the final portfolio asset value. For Gaussian assets the measure is a logarithmic function of the variance and combining independent Gaussian assets of equal variance adds an amount to the diversification. The advantages of this measure include that it naturally extends to any type of distribution and that it takes all moments into account. Furthermore, it can be used in cases of undefined weights (zero-cost assets) or moments. We present examples which apply this measure to derivative overlays.
Kirchner Ulrich
Zunckel Caroline
No associations
LandOfFree
Measuring Portfolio Diversification does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with Measuring Portfolio Diversification, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Measuring Portfolio Diversification will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-174635