The formula to calculate the Diversification Ratio (DR) is:
\[ DR = \frac{PV}{WAV} \]
Where:
The Diversification Ratio is a measure used in portfolio management to assess the benefits of diversification. It is calculated by dividing the portfolio volatility by the weighted average volatility of the individual assets within the portfolio. A higher diversification ratio indicates a greater reduction in risk due to diversification. This metric helps investors understand how much risk reduction is achieved by holding a diversified portfolio compared to holding individual assets.
Let's assume the following values:
Using the formula to calculate the Diversification Ratio (DR):
\[ DR = \frac{PV}{WAV} = \frac{0.15}{0.25} = 0.60 \]
The Diversification Ratio (DR) is 0.60.
