RT Journal Article
SR Electronic
T1 Rethinking Portfolio Rebalancing: <em>Introducing</em>
               <br/>
               <em>Risk Contribution Rebalancing as an</em>
               <br/>
               <em>Alternative Approach to Traditional</em>
               <br/>
               <em>Value-Based Rebalancing Strategies</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 34
OP 46
DO 10.3905/jpm.2014.40.3.034
VO 40
IS 3
A1 Alexander Kohler
A1 Hagen Wittig
YR 2014
UL https://pm-research.com/content/40/3/34.abstract
AB The authors propose a new approach to portfolio rebalancing: by decomposing the investor’s strategic asset allocation into the various asset classes’ percentage contributions to risk. Instead of the asset classes’ commonly used value weights, a practitioner would apply this set of risk contributions to controlling rebalancing procedures during the investment phase. In strong contrast to traditional value-based rebalancing strategies, the resulting risk contribution strategies are capable of triggering rebalancing procedures, based on deviations in an asset class’s standalone volatility or correlation to the portfolio’s remaining asset classes. Thus, this method lets practitioners closely maintain the asset classes’ initial risk contributions. In performance terms, during the backtesting sample period from January 1996 to February 2013, the rebalancing strategies based on risk contributions deliver returns that are comparable to traditional value-based rebalancing strategies, but at much lower volatility levels, which translates into higher Sharpe ratios.TOPICS: Portfolio theory, in portfolio management, statistical methods