The Diversification Delta : A Different Perspective

Vermorken et al. (2012) introduce a new measure of diversification, the Diversification Delta based on the empirical entropy. The entropy as a measure of uncertainty has successfully been used in several frameworks and takes into account the uncertainty related to the entire statistical distribution and not just the first two moments of a distribution. However, the suggested Diversification Delta measure has a number of drawbacks that we highlight in this article. We also propose an alternative measure based on the exponential entropy which overcomes the identified shortcomings. We present the properties of this new measure and illustrate its usefulness in an empirical example of a portfolio of U.S. stocks and bonds