Improved Risk Reporting with Factor-Based Diversification Measures

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

Appendices

Figure 16: Diversification Measures for the S&P500 at a Yearly Frequency and Using Rolling-Windows of 1 Year for the Covariance (Inverse Herfindahl Metric)

These figures display the effective number of constituents (ENC) and the effective number of uncorrelated bets (ENB) of the S&P500 computed with a PCA approach, an MLT approach, and uncorrelated Fama-French factors. The PCA and MLT methods are based on a robustified version of the sample covariance matrix estimated with rolling-windows of 52 weeks of constituents’ returns between January 1959 until the end of December 2012.

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An EDHEC-Risk Institute Publication