Economy – Quantitative Finance – Portfolio Management
Scientific paper
2011-09-06
Financial Analysts Journal, Volume 67, No. 4, 2011, p. 42-49
Economy
Quantitative Finance
Portfolio Management
14 pages
Scientific paper
Diversification return is an incremental return earned by a rebalanced portfolio of assets. The diversification return of a rebalanced portfolio is often incorrectly ascribed to a reduction in variance. We argue that the underlying source of the diversification return is the rebalancing, which forces the investor to sell assets that have appreciated in relative value and buy assets that have declined in relative value, as measured by their weights in the portfolio. In contrast, the incremental return of a buy-and-hold portfolio is driven by the fact that the assets that perform the best become a greater fraction of the portfolio. We use these results to resolve two puzzles associated with the Gorton and Rouwenhorst index of commodity futures, and thereby obtain a clear understanding of the source of the return of that index. Diversification return can be a significant source of return for any rebalanced portfolio of volatile assets.
No associations
LandOfFree
Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-94191