How would I interpret the magnitude of the Diversification ratio? I know that the higher the number, the better, but is 1.1 massively different that 1.2?

For example a sharpe ratio of 0.25 is significantly different than a sharpe of 0.40, so similarly, what is the magnitude of significance for the diversification ratio?

Below is where I found the definition


  • $\begingroup$ 1.0 is no diversification at all (everything in TSLA), 1.1 or 1.2 is trivial amount of diversification. A typical MW country index has DR of 2 or 3. With some judicious choices the DR can be raised to 3, 4, 5 , ... tobam.fr/wp-content/uploads/2017/01/… The square of the DR is the number of fully independent factors (in theory). $\endgroup$ – noob2 Jun 27 '18 at 19:36
  • $\begingroup$ So DR=1.4142 is the DR if you invested in 2 completely uncorrelated stocks. $\endgroup$ – noob2 Jun 27 '18 at 19:39
  • $\begingroup$ @noob2 thank you. So just to verify, there is really no difference between a ratio of 1.02 and 1.24. I ask because I am getting 1.02 with 2 assets and 1.24 with 18 assets. I can't really state that these are materially different right? These are correlated assets $\endgroup$ – QFqs Jun 27 '18 at 20:39
  • $\begingroup$ IMHO you don't have enough stocks for good diversification yet, keep going $\endgroup$ – noob2 Jun 27 '18 at 21:52
  • $\begingroup$ @noob2 Ah, sorry. Let me give you some background on what I am trying to do. The conclusion I am trying to get to is, "You need at least X number of funds to achieve similar diversification to the index". The index has 18 securities. Using combinations, the average DR of 2 assets is 1.14, but with 8 assets its 1.22. The index's DR with all 18 securities is 1.24. $\endgroup$ – QFqs Jun 28 '18 at 14:15

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