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
Date Written: Septembre 2015
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: Suggested Citation