PT  - JOURNAL ARTICLE
AU  - Donald R. Chambers
AU  - John S. Zdanowicz
TI  - The Limitations of Diversification Return
AID  - 10.3905/jpm.2014.40.4.065
DP  - 2014 Jul 31
TA  - The Journal of Portfolio Management
PG  - 65--76
VI  - 40
IP  - 4
4099  - https://pm-research.com/content/40/4/65.short
4100  - https://pm-research.com/content/40/4/65.full
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 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