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Testing Rebalancing Strategies for Stock-Bond Portfolios: Where Is the Value Added of Rebalancing?Hubert DichtlAlpha Portfolio Advisors Wolfgang DrobetzUniversity of Hamburg Martin WambachUniversity of Hamburg August 29, 2012 Midwest Finance Association 2012 Annual Meetings Paper 2012 European Financial Management Symposium on Asset Management 2012 Kölner Finanzmarktkolloquium on Asset Management Abstract: We apply a stationary bootstrap approach that enables us to test the value added of rebalancing for stock-bond portfolios using historical data from the United States, the United Kingdom, and Germany. Analyzing the Sharpe ratio, the Omega measure, and the Sortino ratio as simple measures of value added, our historical simulation results provide strong evidence that all rebalancing strategies significantly outperform a buy-and-hold strategy. This outperformance is attributable to reduced risk, while there are no statistical differences in returns between rebalancing and buy-and-hold. Therefore, we conclude that it is a risk management argument, which justifies the widespread use of rebalancing in investment practice: The primary objective of any rebalancing strategy is the reduction of risk relative to a given asset allocation.
Number of Pages in PDF File: 27 Keywords: rebalancing, bootstrap, performance measurement, statistical inference, stock-bond portfolio JEL Classification: G11 working papers seriesDate posted: September 15, 2011 ; Last revised: August 31, 2012Suggested Citation |
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