Coherent Diversification Measures in Portfolio Theory: An Axiomatic Foundation

Risks 2022, 10(11), 205; https://doi.org/10.3390/risks10110205

19 Pages Posted: 21 Sep 2016 Last revised: 5 Jan 2023

See all articles by Gilles Boevi Koumou

Gilles Boevi Koumou

Chaire Desjardins en Finance Responsable, École de Gestion, Université de Sherbrooke

Georges Dionne

HEC Montreal - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 26, 2016

Abstract

We provide an axiomatic foundation for the measurement of correlation diversification in a one-period portfolio model. We propose a set of eight desirable axioms for this class of diversification measures. We name the measures satisfying these axioms coherent correlation diversification measures. We study the compatibility of our axioms with rank-dependent expected utility theory. We also test them against the two most frequently used methods for measuring correlation diversification in portfolio theory: portfolio variance and the diversification ratio. Lastly, we provide an example of a functional representation of a coherent correlation diversification measure.

Keywords: portfolio theory; diversification measurement; correlation diversification, diversification ratio; portfolio variance; rank-dependent expected utility theory

JEL Classification: D81, G1, G11

Suggested Citation

Koumou, Gilles and Dionne, Georges, Coherent Diversification Measures in Portfolio Theory: An Axiomatic Foundation (August 26, 2016). Risks 2022, 10(11), 205; https://doi.org/10.3390/risks10110205, Available at SSRN: https://ssrn.com/abstract=2830516.

Gilles Koumou (Contact Author)

Chaire Desjardins en Finance Responsable, École de Gestion, Université de Sherbrooke ( email )

2500 bd de l'Universite
Sherbrooke, Québec J1K 2R1
Canada

Georges Dionne

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
3
Abstract Views
514
PlumX Metrics