An Index of Portfolio Diversification

A recurring question in the literature concerning diversification is what is the minimum number of securities required to achieve adequate diversification. The problem is that studies on this topic assume equally distributed holdings. In reality, portfolios are not evenly divided. The purpose of this paper is to evaluate the ability offive different measures of diversification to provide meaningful information about the degree of diversi’cation of an unevenly distributed stock portfolio. The complement of the Herjindahl index was found to be the best of the jive measures and its explanatory power was deemed to be adequate for general use.