Diversification and the Distribution of Portfolio Variance, Part 1: Sums of IID Variables and Higher-Order Moments
5 Pages Posted: 3 Jan 2018 Last revised: 8 Jul 2020
Date Written: July 17, 2017
For a weighted sum of asset returns that are independent and identically distributed (IID) up to variance, we derive expressions linking the distribution of variance across assets with higher-order portfolio moments, assuming these quantities are finite. In particular, we show concise relationships for portfolio skewness and kurtosis and, within a general framework, review related metrics in the literature for measuring diversification.
Keywords: Portfolio diversification, Entropy, Effective support size, Higher-order moments, Skewness, Kurtosis
JEL Classification: C10, C40, C49, G11
Suggested Citation: Suggested Citation