Unifying Portfolio Diversification Measures Using Rao's Quadratic Entropy

Nettey Boevi Gilles Koumou () and Kevin Moran

Cahiers de recherche from Centre de recherche sur les risques, les enjeux économiques, et les politiques publiques

Abstract: This paper extends the use of Rao(1982b)’s Quadratic Entropy (RQE) to modern portfolio theory. It argues that the RQE of a portfolio is a valid, flexible and unifying approach to measuring portfolio diversification. The paper demonstrates that portfolio’s RQE can encompass most existing measures, such as the portfolio variance, the diversification ratio, the normalized portfolio variance, the diversification return or excess growth rates, the Gini-Simpson indices, the return gaps, Markowitz’s utility function and Bouchaud’s general free utility. The paper also shows that assets selected under RQE can protect portfolios from mass destruction (systemic risk) and an empirical illustration suggests that this protection is substantial.

Keywords: Portfolio Diversification; Rao’s Quadratic Entropy; Diversification Return; Portfolio Variance Normalized; Gini-Simpson Index; Markowitz’s Utility Function; Bouchaud’s General Free Utility (search for similar items in EconPapers)
JEL-codes: C93 J33 M52 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Unifying Portfolio Diversification Measures Using Rao’s Quadratic Entropy (2023)
Working Paper: Unifying Portfolio Diversification Measures Using Rao's Quadratic Entropy (2015)
Working Paper: Unifying Portfolio Diversification Measures Using Rao's Quadratic Entropy (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:crrecr:1502

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