Rao’s Quadratic Entropy and Maximum Diversification Indexation

CARMICHAEL, Benoît, KOUMOU, Gilles Boevi, et MORAN, Kevin. Rao’s quadratic entropy and maximum diversification indexation. Quantitative Finance, 2018, vol. 18, no 6, p. 1017-1031.

Posted: 8 Mar 2017 Last revised: 27 Mar 2019

See all articles by Benoit Carmichael

Benoit Carmichael

Université Laval

Gilles Boevi Koumou

Université Mohammed VI Polytechnique

Kevin Moran

Laval University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: Septembre 2015

Abstract

This paper proposes a new formulation of the maximum diversification indexation strategy based on Rao’s Quadratic Entropy. It clarifies the investment problem underlying this diversification strategy, identifies the source of its out-of-sample performance, and suggests new 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

JEL Classification: G11

Suggested Citation

Carmichael, Benoit and Koumou, Gilles and Moran, Kevin, Rao’s Quadratic Entropy and Maximum Diversification Indexation (Septembre 2015). CARMICHAEL, Benoît, KOUMOU, Gilles Boevi, et MORAN, Kevin. Rao’s quadratic entropy and maximum diversification indexation. Quantitative Finance, 2018, vol. 18, no 6, p. 1017-1031., Available at SSRN: https://ssrn.com/abstract=2923220

Benoit Carmichael

Université Laval ( email )

Quebec G1K 7P4
Canada

Gilles Koumou (Contact Author)

Université Mohammed VI Polytechnique ( email )

Rabat
Morocco

Kevin Moran

Laval University - Department of Economics ( email )

2325 Rue de l'Université
Ste-Foy, Quebec G1K 7P4 G1K 7P4
Canada

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