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Analysis of the rebalancing frequency in log-optimal portfolio selection

Daniel Kuhn & David G. Luenberger

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abstract In a dynamic investment situation, the right timing of portfolio revisions and adjustments is essential to sustain long-term growth. A high rebalancing frequency reduces the portfolio performance in the presence of transaction costs, whereas a low rebalancing frequency entails a static investment strategy that hardly reacts to changing market conditions. This article studies a family of portfolio problems in a Black-Scholes type economy which depend parametrically on the rebalancing frequency. As an objective criterion we use log-utility, which has strong theoretical appeal and represents a natural choice if the primary goal is long-term performance. We argue that continuous rebalancing only slightly outperforms discrete rebalancing if there are no transaction costs and if the rebalancing intervals are shorter than about one year. Our analysis also reveals that diversification has a dual effect on the mean and variance of the portfolio growth rate as well as on their sensitivities with respect to the rebalancing frequency.
   
type journal paper
   
keywords Portfolio selection, Log utility, Growth-optimal portfolio, Rebalancing frequency, Kelly criterion
   
language English
kind of paper journal article
date of appearance 1-2-2010
journal Quantitative Finance
publisher Routledge (Milton Park, UK)
ISSN 1469-7688
ISSN (online) 1469-7696
DOI 10.1080/14697680802629400
volume of journal 10
number of issue 2
page(s) 221-234
review double-blind review
   
citation Kuhn, D., & Luenberger, D. G. (2010). Analysis of the rebalancing frequency in log-optimal portfolio selection. Quantitative Finance, 10(2), 221-234, DOI:10.1080/14697680802629400.