Portfolio diversification is an important risk mitigation strategy. However, the measurement of the degree of diversification in a portfolio may not be straightforward. Herfindahl-Hirschman Index is one of the most popular measure of diversification but the index does not account for the correlations across assets in a portfolio. We propose in this paper a more general and effective measure, the Generalized Herfindahl-Hirschman Index, to quantify the degree of diversification in a credit portfolio across multiple layers of correlated sectors and subsectors.
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