Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle
Posted: 9 Aug 2011
Date Written: August 9, 2011
Diversification return is an incremental return earned by a rebalanced portfolio of assets. The author argues that the underlying source of the diversification return is the rebalancing; in contrast, the incremental return of a buy-and-hold portfolio is driven by the fact that the best-performing assets become a greater fraction of the portfolio. On the basis of these findings, the author resolves two aspects of a puzzle associated with Gorton and Rouwenhorst’s index of commodity futures.
Keywords: Portfolio Management, Portfolio Construction and Revision, Portfolio Monitoring and Rebalancing, Diversification Issues, Alternative Investments, Commodities
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