Generalized Herndahl-Hirschman Index to Estimate Diversity Score of a Portfolio across Multiple Correlated Sectors

Authors: Vaibhav Anand & Ramasubramanian S V, IFMR Capital – January 2015

Abstract:

Portfolio diversifi cation is an important risk mitigation strategy. However, the measurement of the degree of diversifi cation in a portfolio may not be straightforward. Her ndahl-Hirschman Index is one of the most popular measure of diversi fication but the index does not account for the correlations across assets in a portfolio. We propose in this paper a more general and eff ective measure, the Generalized Her ndahl-Hirschman Index, to quantify the degree of diversifi cation in a credit portfolio across multiple layers of correlated sectors and subsectors.

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