Question

We know that Diversification Return = Geometric Mean Return - Strategic Return. Select one:

a. The diversification return then might be argued to serve as a measure of the added geometric return that diversification and/or rebalancing can generate through the reduction of risk caused by assembling imperfectly correlated risky assets into a portfolio.

b. The strategic return can be obtained through any portfolio rebalancing of the underlying assets.

c. Strategic return is never used as a hypothetical benchmark for evaluating portfolios’ actual geometric mean returns.

d. The strategic return is a key concept in diversification return and it has very clear economic meaning.

Answer 1

The Correct Option is A

The Diversification refers to investing or allocaating the money in different assets to reduce the effect of Volatility of the market and it is calculated by "Diversification Return = Geometric Mean Return - Strategic Return", The Strategic return can be referred as the Geometric mean return of the diversified portfolio that contains "0 Volatility" assets and the returns cannot be achieved by only rebalancing the underlying assets unless they have zero volatility.( So Option 2 is Wrong) which makes it No clear economic meaning. (Option 4 also wrong).

While the Diversification can be argued to serve as a measure of the added geometric return that diversification and/or rebalancing can generate through the reduction of risk caused by assembling imperfectly correlated risky assets into a portfolio.