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Computing optimal rebalance frequency for log-optimal portfolios

Sujit R. Das, Dmitri Kaznachey and Mukul Goyal

Quantitative Finance, 2014, vol. 14, issue 8, 1489-1502

Abstract: Log-optimal investment portfolio is deemed to be impractical and cost-prohibitive due to inherent need for continuous rebalancing and significant overhead of trading cost. We study the question of how often a log-optimal portfolio should be rebalanced for any given finite investment horizon. We develop an analytical framework to compute the expected log of portfolio growth when a given discrete-time periodic rebalance frequency is used. For a certain class of portfolio assets, we compute the optimal rebalance frequency . We show that it is possible to improve investor log utility using this quasi-passive or hybrid rebalancing strategy. Simulation studies show that an investor shall gain significantly by rebalancing periodically in discrete time, overcoming the limitations of continuous rebalancing.

Date: 2014
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Handle: RePEc:taf:quantf:v:14:y:2014:i:8:p:1489-1502