Measuring Diversification
Diversification is one of the most fundamental risk management concepts in finanical economics. But how do we measure "highe" or "low" degrees of diversification? Several approaches exist.
Normalized Portfolio Variance
The expected portfolio variance of an equal-weighted portfolio with N positions is...
var(p) = (1/N)*var_avg + cov_avg(N-1)/N
var(p)... portfolio variance
N... number of positions
var_avg... average variance of all positions
Deviation from the Market Portfolio
...
Number of Positions
...
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