Simple Formulas for Portfolio Rebalancing Rules

12 Pages Posted: 26 Feb 2019

Date Written: February 10, 2019

Abstract

Portfolio rebalancing rules are used by large scale asset managers to manage a trade-off between frequent rebalancing on one hand, and a cost of deviating from the portfolio benchmark on the other. This note contributes to the design of such policies in two ways. First, it clarifies the analytical framework, by showing how the rebalancing problem can be formulated in a standard model for asset management. Although this step is straightforward, it is important as it makes a clear distinction between a risk factor and a risk factor exposure. Keeping this distinction facilitates the design of the optimal policy.

Second, for a given policy the note provides closed form expressions for certain statistical quantities relevant for the policy design. These include average rebalancing frequency, average annual transaction amount, mean square deviation from benchmark, and mean absolute deviation from benchmark. The resulting formulas are simple arithmetic expressions, easy to interpret and straightforward to implement.

Suggested Citation

Skallsjö, Sven R., Simple Formulas for Portfolio Rebalancing Rules (February 10, 2019). Available at SSRN: https://ssrn.com/abstract=3331894 or http://dx.doi.org/10.2139/ssrn.3331894

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
183
Abstract Views
892
Rank
248,128
PlumX Metrics