Optimal Rebalancing: A Scalable Solution

Journal Of Investment Management (JOIM), First Quarter 2009

Posted: 11 Feb 2009 Last revised: 9 Jul 2010

See all articles by Mark Kritzman

Mark Kritzman

Windham Capital Management

Simon Myrgren

State Street Associates

Sebastien Page

State Street Associates

Date Written: February 9, 2009

Abstract

Institutional investors usually employ mean-variance analysis to determine optimal portfolio weights. Almost immediately upon implementation, however, the portfolio's weights become sub-optimal as changes in asset prices cause the portfolio to drift away from the optimal targets. We apply a quadratic heuristic to address the optimal rebalancing problem, and we compare it to a dynamic programming solution as well as to standard industry heuristics. The quadratic heuristic provides solutions that are remarkably close to the dynamic programming solution. Moreover, unlike the dynamic programming solution, the quadratic heuristic is scalable to as many as several hundreds assets.

Keywords: Optimal Rebalancing, Multi-Period Optimization, Dynamic Programming

JEL Classification: G00

Suggested Citation

Kritzman, Mark and Myrgren, Simon and Page, Sebastien, Optimal Rebalancing: A Scalable Solution (February 9, 2009). Journal Of Investment Management (JOIM), First Quarter 2009, Available at SSRN: https://ssrn.com/abstract=1340013

Mark Kritzman (Contact Author)

Windham Capital Management ( email )

5 Revere Street
Cambridge, MA 02138
United States
617-576-7360 (Phone)
617-576-7359 (Fax)

Simon Myrgren

State Street Associates ( email )

138 Mount Auburn Street
Cambridge, MA 02138
United States

Sebastien Page

State Street Associates ( email )

138 Mount Auburn Street
Cambridge, MA 02138
United States
617-234-9462 (Phone)
617-234-9478 (Fax)

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