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research article

Analysis of the rebalancing frequency in log-optimal portfolio selection

Kuhn, Daniel  
•
Luenberger, David G.
2010
Quantitative Finance

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.

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Type
research article
DOI
10.1080/14697680802629400
Author(s)
Kuhn, Daniel  
•
Luenberger, David G.
Date Issued

2010

Published in
Quantitative Finance
Volume

10

Issue

2

Start page

221

End page

234

Subjects

Portfolio selection

•

Log utility

•

Growth-optimal portfolio

•

Rebalancing frequency

•

Kelly criterion

URL

URL

http://www.tandfonline.com/doi/abs/10.1080/14697680802629400?journalCode=rquf20#.Ut6L7_tKG70
Editorial or Peer reviewed

NON-REVIEWED

Written at

OTHER

EPFL units
RAO  
Available on Infoscience
January 21, 2014
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/100067
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