A New Formulation of Maximum Diversification Indexation Using Rao's Quadratic Entropy

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

Cahiers de recherche from CIRPEE

Abstract: This paper proposes a new formulation of the Maximum Diversification indexation strategy based on Rao’s Quadratic Entropy (RQE). It clarifies the investment problem underlying the Most Diversified Portfolio (MDP) formed with this strategy, identifies the source of the MDP’s out-of-sample performance, and suggests dimensions along which this performance can be improved. We show that these potential improvements are quantitatively important and are robust to portfolio turnover, portfolio risk, estimation window, and covariance matrix estimation.

Keywords: Rao's Quadratic Entropy; Portfolio Diversification; Maximum Diversification Indexation; Diversification Ratio; Most Diversified Portfolio (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: A New Formulation of Maximum Diversification Indexation Using Rao's Quadratic Entropy (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1519

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