RT Journal Article
SR Electronic
T1 The Limitations of Diversification Return
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 65
OP 76
DO 10.3905/jpm.2014.40.4.065
VO 40
IS 4
A1 Chambers, Donald R.
A1 Zdanowicz, John S.
YR 2014
UL http://jpm.pm-research.com/content/40/4/65.abstract
AB Diversification return is the amount by which the geometric mean return (i.e., average compounded return) of a portfolio exceeds the weighted average of the geometric means of the portfolioâ€™s constituent assets. Diversification return has been touted as a source of added return, even if markets are informationally efficient. Portfolio rebalancing has been advocated as a valuable source of diversification return. The authors demonstrate that diversification return is not a source of increased expected value. However, portfolio rebalancing can be an effective mean-reverting strategy. Any enhanced expected value from rebalancing emanates from mean-reversion, rather than from diversification or variance reduction.