Example of Volatility Pumping

This script demonstrates the phenomenon of excess growth in a constant rebalancing portfolio.

Description

The self-contained script demonstrates excess, volatility driven growth, in a rebalanced portfolio.

Based on the paper "Benchmarking and Rebalancing" by Gabay and Herlemont, yats.com, 19 Septembre 2007, this script reproduces example 1, showing the long-term rebalancing excess growth rate g*.

There is an apparent paradox when considering a portfolio of risky assets that by rebalancing between them in constant proportions, under certain conditions, one can observe excess long-term growth above the expected best buy and hold strategy.

This script reproduces previous known work and can act as a starting point for people interested in examining this in more detail.

• MATLAB release: MATLAB 7.10 (2010a)