Diversification, Rebalancing, and the Geometric Mean Frontier

27 Pages Posted: 16 Jan 1998  

William J. Bernstein

Frontier Advisors

David J. Wilkinson

Efficient Solutions Inc.

Date Written: November 24, 1997

Abstract

The effective (geometric mean) return of a periodically rebalanced portfolio always exceeds the weighted sum of the component geometric means. Some approximate formulae for estimating this effective return are derived and tested. One special case of these formulae is shown to be particularly simple, and is used to provide easily computed estimates of the benefits of diversification and rebalancing. The results are also used to show how classical Mean-Variance Optimization may be modified to generate the Geometric Mean Frontier, the analog of the efficient frontier when the geometric mean is used as the measure of portfolio return.

JEL Classification: G1, C0, C6, C7

Suggested Citation

Bernstein, William J. and Wilkinson, David J., Diversification, Rebalancing, and the Geometric Mean Frontier (November 24, 1997). Available at SSRN: https://ssrn.com/abstract=53503 or http://dx.doi.org/10.2139/ssrn.53503

William J. Bernstein

Frontier Advisors ( email )

1890 Waite Dr. Suite 3
North Bend, 97459
541-756-0668 (Phone)
541-756-3774 (Fax)

David J. Wilkinson (Contact Author)

Efficient Solutions Inc. ( email )

311 Ned's Mountain Road
Ridgefield, CT 06877
United States
(203)744-4023 (Phone)

Paper statistics

Downloads
980
Rank
16,918
Abstract Views
3,410