Effective Number of Bets — effective

Computes the diversification probability distribution and the effective number of bets of an allocation.

Usage

effective_bets(b, sigma, t)

Arguments

b: A vector of exposures (allocations).
sigma: A n x n covariance matrix.
t: A n x n torsion matrix.

Value

A list of length 2 with:

p: the diversification probability distribution;
enb: the effective number of bets.

Examples

# extract the invariants from the data
set.seed(123)
log_ret <- matrix(rnorm(400), ncol = 4) / 10

# compute the covariance matrix
sigma <- stats::cov(log_ret)

# torsion
torsion_cov <- torsion(sigma = sigma, model = 'minimum-torsion', method ='exact')

# 1/N reference
b <- rep(1 / ncol(log_ret), ncol(log_ret))

# ENB
effective_bets(b = b, sigma = sigma, t = torsion_cov)
#> $p
#>           [,1]
#> [1,] 0.1886652
#> [2,] 0.2822564
#> [3,] 0.2262331
#> [4,] 0.3028453
#> 
#> $enb
#> [1] 3.934066
#>