Economics at your fingertips  

Coherent diversification measures in portfolio theory: An axiomatic foundation

Gilles Boevi Koumou () and Georges Dionne
Additional contact information
Gilles Boevi Koumou: HEC Montreal, Canada Research Chair in Risk Management

No 19-2, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: This paper provides an axiomatic foundation of the measurement of diversification in a one-period portfolio theory under the assumption that the investor has complete information about the joint distribution of asset returns. Four categories of portfolio diversification measures can be distinguished: the law of large numbers diversification measures, the correlation diversification measures, the market portfolio diversification measures and the risk contribution diversification measures. We offer the first step towards a rigorous theory of correlation diversification measures. We propose a set of nine desirable axioms for this class of diversification measures, and name the measures satisfying these axioms coherent diversification measures that we distinguish from the notion of coherent risk measures. We provide the decision-theoretic foundations of our axioms by studying their compatibility with investors’ preference for diversification in two important decision theories under risk: the expected utility theory and Yaari’s dual theory. We explore whether useful methods of measuring portfolio diversification satisfy our axioms. We also investigate whether or not our axioms have forms of representation.

Keywords: Portfolio theory; portfolio diversification; preference for diversification; correlation diversification; expected utility theory; dual theory. (search for similar items in EconPapers)
JEL-codes: D81 G01 G11 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2019-03-12
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: Track citations by RSS feed

Downloads: (external link) Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Working Papers from HEC Montreal, Canada Research Chair in Risk Management Contact information at EDIRC.
Bibliographic data for series maintained by Claire Boisvert ().

Page updated 2021-01-16
Handle: RePEc:ris:crcrmw:2019_002