10 Pages Posted: 12 Dec 2005
Date Written: May 2005
This note is a response to a recent paper by Erb and Harvey (2005). We show that diversification returns are mathematical properties of geometric averages of index returns, and not due to rebalancing. We also show how rebalancing affects the performance of the equal-weighted commodity futures index constructed by Gorton and Rouwenhorst (2005). Because rebalancing is an embedded trading strategy, it can be a source of return. Less frequent rebalancing would have increased, rather than lowered the performance of the equally-weighted commodity index.
Keywords: Commodity, commodities, futures, diversification
JEL Classification: G2, G15, N2
Suggested Citation: Suggested Citation
Gorton, Gary B. and Rouwenhorst, K. Geert, A Note on Erb and Harvey (2005) (May 2005). Yale ICF Working Paper No. 06-02. Available at SSRN: https://ssrn.com/abstract=869064