TY - JOUR T1 - The Limitations of Diversification Return JF - The Journal of Portfolio Management SP - 65 LP - 76 DO - 10.3905/jpm.2014.40.4.065 VL - 40 IS - 4 AU - Donald R. Chambers AU - John S. Zdanowicz Y1 - 2014/07/31 UR - https://pm-research.com/content/40/4/65.abstract N2 - 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 portfolio’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.TOPICS: Equity portfolio management, volatility measures, statistical methods ER -