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Coherent Diversification Measures in Portfolio Theory: An Axiomatic Foundation

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  • Gilles Boevi Koumou

    (Africa Institute for Research in Economics and Social Sciences (AIRESS), Faculté de Gouvernance, Sciences Économiques et Sociales (FGSES), Université Mohammed VI Polytechnique (UM6P), Campus de Rabat, Rocade Rabat-Salé, Rabat 11103, Morocco)

  • Georges Dionne

    (Canada Research Chair in Risk Management, Department of Finance, HEC Montréal, 3000, Chemin de la Côte-Sainte-Catherine, Montréal, QC H3T 2A7, Canada)

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.

Suggested Citation

  • Gilles Boevi Koumou & Georges Dionne, 2022. "Coherent Diversification Measures in Portfolio Theory: An Axiomatic Foundation," Risks, MDPI, vol. 10(11), pages 1-19, October.
    • Handle: RePEc:gam:jrisks:v:10:y:2022:i:11:p:205-:d:954228
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    3. Han, Xia & Lin, Liyuan & Wang, Ruodu, 2023. "Diversification quotients based on VaR and ES," Insurance: Mathematics and Economics, Elsevier, vol. 113(C), pages 185-197.

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    More about this item

    Keywords

    portfolio theory; diversification measurement; correlation diversification; diversification ratio; portfolio variance; rank-dependent expected utility theory;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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