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Title: A New Formulation of Maximum Diversification Indexation Using Rao's Quadratic Entropy
Authors: Carmichael, Benoît
Koumou, Gilles Boevi
Moran, Kevin
Keywords: Rao's Quadratic Entropy
Portfolio Diversification
Maximum Diversification Indexation
Diversification Ratio
Most Diversified Portfolio
Issue Date: 2015-09
Series/Report no.: Cahiers du CIRPÉE;15-19
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.
URI: https://depot.erudit.org/id/004050dd
Appears in Collections:Cahiers de recherche du CIRPÉE

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