Improved Risk Reporting with Factor-Based Diversification Measures

Improved Risk Reporting with Factor-Based Diversification Measures — February 2014

Appendices

Figure 20: Diversification Measures for the S&P500 at a Weekly Frequency and Using Rolling-Windows of 5 Years for the Covariance (Entropy Metric)

These figures display the effective number of constituents (ENC) and the effective number of uncorrelated bets (ENB) computed with a PCA approach and an MLT approach of the S&P500. The PCA and MLT methods are based on a robustified version of the sample covariance matrix estimated with rolling-windows of 260 weeks of constituents’ returns between January 1959 until the end of December 2012.

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An EDHEC-Risk Institute Publication