TY - JOUR T1 - Optimal Rebalancing for Institutional Portfolios JF - The Journal of Portfolio Management SP - 33 LP - 43 DO - 10.3905/jpm.2006.611801 VL - 32 IS - 2 AU - Walter Sun AU - Ayres Fan AU - Li-Wei Chen AU - Tom Schouwenaars AU - Marius A. Albota Y1 - 2006/01/31 UR - https://pm-research.com/content/32/2/33.abstract N2 - Institutional fund managers generally rebalance using ad hoc methods such as calendar periods or tolerance band triggers. Another approach is to quantify the cost of a rebalancing strategy in terms of risk-adjusted returns net of transaction costs. An optimal rebalancing strategy that actively seeks to minimize that cost uses certainty-equivalents and the transaction costs associated with a policy to define a cost-to-go function. Stochastic programming is then used to minimize expected cost-to-go. Monte Carlo simulations demonstrate that the method outperforms traditional rebalancing strategies such as periodic and 5% tolerance rebalancing.TOPICS: Mutual funds/passive investing/indexing, quantitative methods, simulations ER -