Analysis of the rebalancing frequency in log-optimal portfolio selection
Journal
Quantitative Finance
ISSN
1469-7688
ISSN-Digital
1469-7696
Type
journal article
Date Issued
2010-02-01
Author(s)
Kuhn, Daniel
;
Luenberger, David G.
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.
Language
English
Keywords
Portfolio selection
Log utility
Growth-optimal portfolio
Rebalancing frequency
Kelly criterion
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Routledge
Publisher place
Milton Park, UK
Volume
10
Number
2
Start page
221
End page
234
Pages
14
Subject(s)
Division(s)
Eprints ID
60683