Equally diversified or equally weighted?
New diversification measure enables construction of equally diversified portfolios
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Gianluca Fusai, Domenico Mignacca, Andrea Nardon and Ben Human show how to decompose portfolio volatility into undiversified volatility and a diversification component. The authors’ decomposition has a clear statistical interpretation because it relates the diversification component to partial covariances. On this basis, they advocate the construction of an equally diversified portfolio. An empirical analysis illustrates the superior out-of-sample performance of
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