DEFINITION of 'Diversity Score'

A measure, created by Moody's Investors Service, to estimate the diversification in a portfolio, specifically in the context of a collateralized debt obligation (CDO). The calculation methodology for a diversification score takes into account the extent to which a portfolio is diversified by industry.

BREAKING DOWN 'Diversity Score'

Technically speaking, the diversification score measures the number of uncorrelated assets that would have the same loss distribution as the actual portfolio of correlated assets. For example, if a portfolio of 100 assets had a diversification score of 50, this means that the 100 correlated assets have the same loss distribution as 50 uncorrelated assets.

RELATED TERMS
  1. Diversification

    A risk management technique that mixes a wide variety of investments ...
  2. Credit Score

    A statistically derived numeric expression of a person's creditworthiness ...
  3. Collateralized Debt Obligation ...

    An investment-grade security backed by a pool of bonds, loans ...
  4. FAKO Score

    A derogatory term for a credit score that is not one of the FICO ...
  5. International Portfolio

    A grouping of investment assets that focuses on securities from ...
  6. Company Risk

    The financial uncertainty faced by an investor who holds securities ...
Related Articles
  1. Investing

    Portfolio Diversification, Done Right

    Diversifying your portfolio by means of different securities and asset classes is an essential approach to lower the overall risk of a portfolio.
  2. Financial Advisor

    Concentrated Vs. Diversified Portfolios: Comparing the Pros and Cons

    Examine the relative advantages and disadvantages of utilizing either a concentrated or a diversified investment portfolio strategy.
  3. Investing

    The Dangers Of Over-Diversifying Your Portfolio

    If you over-diversify your portfolio, you might not lose much, but you won't gain much either.
  4. Investing

    Diversification: Protecting Portfolios From Mass Destruction

    This investing strategy retains its charm as a protection against random events in the market.
  5. Investing

    The Importance Of Diversification

    Without this risk-reduction technique, your chance of loss will be unnecessarily high.
  6. Investing

    3 Reasons Successful Investors Do Not Practice Diversification

    Discover why many of the most successful investors do not bother to create a diversified investment portfolio.
  7. Investing

    Diversification Beyond Stocks

    If you think holding several stocks means you're diversified, think again - there's much more to be done to reduce portfolio risk.
  8. Investing

    Introduction To Investment Diversification

    Reducing risk and increasing returns in your portfolio is all about finding the right balance.
  9. Retirement

    Bear-Proof Your Retirement Portfolio

    Find out how to protect your assets so you can live out your dreams in style.
RELATED FAQS
  1. How do investment advisors calculate how much diversification their portfolios need?

    Learn how modern portfolio theory (MPT) can help determine a diversified mix of assets for inclusion in a portfolio that ... Read Answer >>
  2. What types of assets lower portfolio variance?

    Learn what type of assets reduce portfolio variance and how modern portfolio theory uses correlation coefficients. Read Answer >>
  3. What level of correlation among investments will guarantee market returns but have ...

    Learn how modern portfolio theory uses correlation to determine the efficient frontier for which assets to include in a portfolio ... Read Answer >>
  4. How do fund managers use correlation to create portfolio diversity?

    Read about how contemporary investment fund managers use the concept of correlation to add diversification among assets in ... Read Answer >>
  5. How is portfolio variance reduced in Modern Portfolio Theory?

    Learn about modern portfolio theory, specifically what it asserts about asset allocation and managing portfolio risk through ... Read Answer >>
  6. What percentage of a diversified portfolio should large cap stocks comprise?

    Learn more about achieving optimal diversification of an investment portfolio, and specifically about the percentage of large-cap ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center