Abstract. We examine alternative approaches of measuring portfolio diversification, and test the empirical relation between diversification and the future risk-adjusted performance in a crosssection of international multi-asset portfolios. We use the Woerheide and Persson measure as a weight-based diversification measure, the conditional diversification measure as a risk-based diversification measure, and the effective number of bets (ENB) as a factor based diversification measure. We find that only the ENB measure is a significant predictor of the future Sharpe ratios. The economic gains of diversification, as measured by the ENB measure, are large and robust to the investor’s risk aversion and investment horizon.

Keywords: portfolio, diversification, effective number of bets, unsystematic risk.