What is a good investment metric to reward diversification within a portfolio. Suppose we have a fixed income universe and prefer stable currency, mid yield and mid tenors. Our stressed spread var covar matrix suggests that we have correlation factor amongst each currency & fixed income class.

A simple metric would be weighted-portfolio for correlation Possibly the HHI Herfindahl index weights

This is in the context of Solvency II but would apply much more broadly. Any suggestions or solutions?


This extends to not just FI but multi asset class (MAC) as well. You can use a linear MAC factor model to compute specific\unsystematic risk.

Here's are several examples of such a model:

You would compute specific risk the same way you normally would: How to calculate unsystematic risk?

  • $\begingroup$ The second link seems to be broken. I would appreciate if you could post a working link. $\endgroup$ – AK88 Apr 19 '17 at 4:54
  • $\begingroup$ @AK88 thanks, second link should be fixed now. $\endgroup$ – pyCthon Apr 19 '17 at 21:20

Also intrested in this question. A more qualitative approch is presented here.

Can you tell how did you get your variance-covariance matrix? Did you use daily price changes?

Somebody suggested using VaR if you have multi-currency FI portfolio. So you'd have VaR measures for specific bonds and for overall portfolio. And from there maybe you be able to see the difersification effect?

  • $\begingroup$ Generally a comparison (i.e. ratio) of the overall risk(s) of the portfolio to the average risk(s) of the securities within it can be used as a measure of diversification. "Risk" can be std. dev, VaR, other... . See "diversification ratio". $\endgroup$ – noob2 Oct 20 '16 at 14:51
  • $\begingroup$ Thanks, not looking to diversify risk (e.g. on a variance based approach) but reward broad allocation. $\endgroup$ – rrg Oct 22 '16 at 15:01
  • $\begingroup$ @ AK88 covar matrix on monthly $\endgroup$ – rrg Dec 22 '16 at 12:24

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