Unifying Portfolio Diversification Measures Using Rao's Quadratic Entropy

Benoît Carmichael, Nettey Boevi Gilles Koumou () and Kevin Moran

Cahiers de recherche from CIRPEE

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; Diversification Ratio; Portfolio Variance Normalized; Gini-Simpson Index; Markowitz’s Utility Function; Bouchaud’s General Free Utility (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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http://www.cirpee.org/fileadmin/documents/Cahiers_2015/CIRPEE15-08.pdf (application/pdf)

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:lacicr:1508

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