July 07, 2021

The role of diversification return in factor portfolios

The Diversification Return has long been supposed to represent the incremental return associated with portfolios that are regularly rebalanced compared to those that are not. In this paper, we test the hypothesis that it can be correctly associated with a “rebalancing premium” for various factor portfolios.

We then go on to determine how much of the excess return of these factor portfolios may be attributed to the diversification return, and therefore whether or not, a traditional factor-based explanation of their performance is more appropriate.

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