Original Research

Improved investment performance using the portfolio diversification index

Francois van Dyk, Gary van Vuuren, Paul Styger
Journal of Economic and Financial Sciences | Vol 5, No 1 | a311 | DOI: https://doi.org/10.4102/jef.v5i1.311 | © 2018 Francois van Dyk, Gary van Vuuren, Paul Styger | This work is licensed under CC Attribution 4.0
Submitted: 28 June 2018 | Published: 30 April 2012

About the author(s)

Francois van Dyk, Department of Finance, Risk Management and Banking, University of South Africa, South Africa
Gary van Vuuren, School of Economics, North West University, South Africa
Paul Styger, School of Economics, North West University, South Africa

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Abstract

The residual variance method is the traditional method for measuring portfolio diversification relative to a market index. Problems arise, however, when the market index itself is not appropriately diversified. A diversification measurement (Portfolio Diversification Index), free from market index influences, has been recently introduced. This article explores whether this index is a robust and ‘good’ diversification measure compared with the residual variance method. South African unit trusts are diversification-ranked using the two measures and the results compared to the ranking results of several risk performance measures. Measuring relative concentration levels allows concentration risk to be effectively managed, thereby filling a gap in the Basel accords (which omit concentration risk).

Keywords

diversification; concentration; residual variance; Omega ratio; Portfolio Diversification Index

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