Diversification can be quantified as the intra-portfolio correlation. This is a statistical measurement from negative one to one that measures the degree to which the various assets in a portfolio can be expected to perform in a similar fashion.
Intra-portfolio Correlation... Percent of Diversifiable Risk Eliminated...
1 0% .75 12.5% .50 25% .25 37.5% 0 50% -.25 62.5% -.50 75% -.75 87.5% -1 100%Portfolio balance occurs as the sum of all intra-portfolio correlations approaches negative one. Diversification is thus defined as the intra-portfolio correlation or, more specifically, the weighted average intra-portfolio correlation. Maximum diversification occurs when the intra-portfolio correlation is minimized. Intra-portfolio correlation may be an effective risk management measurement. The computation may be expressed as:
Q = Sigma XiXjPij / Sigma XiXj
Where Q is the intra-portfolio correlation, Xi is the fraction invested in asset i, Xj is the fraction invested in asset j, Pij is the correlation between assets i and j, The expression may be computed at least when i does not equal j.