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Medium · portfolio_optimization · Quant Researcher interview question · effective_bets, diversification, pca, shannon_entropy, portfolio_optimization
The Effective Number of Bets (ENB) quantifies a portfolio's true diversification by measuring the Shannon entropy of risk distributed across the principal components of the asset covariance matrix. Introduced by Meucci (2009), this metric helps portfolio managers distinguish nominal diversification from genuine risk-spreading. A high ENB indicates risk is spread across many independent sources, while a low ENB suggests concentration in a few systematic factors. Task Implement the function effec