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Primary Article

Portfolio Rebalancing in Theory and Practice

Yesim Tokat and Nelson W Wicas
The Journal of Investing Summer 2007, 16 (2) 52-59; DOI: https://doi.org/10.3905/joi.2007.686411
Yesim Tokat
An investment analyst at Investment Counseling and Research, The Vanguard Group, Inc. in Valley Forge, PA.
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  • For correspondence: yesim_tokat@vanguard.com
Nelson W Wicas
A principal at Investment Counseling and Research, The Vanguard Group, Inc. in Valley Forge, PA.
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  • For correspondence: nelson_wicas@vanguard.com
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Abstract

A portfolio's asset allocation determines the portfolio's risk and return characteristics. To maintain its original risk and return characteristics over time, the portfolio must be rebalanced. This paper identifies the factors that influence a rebalancing strategy. We present a conceptual framework for developing rebalancing strategies that can accommodate changes in the financial market environment and in asset class characteristics, as well as account for an institution's unique risk tolerance and time horizon. We conduct simulations to analyze how these different factors and different rebalancing guidelines affect a portfolio's risk and return characteristics. We conclude with a review of practical rebalancing considerations.

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The Journal of Investing
Vol. 16, Issue 2
Summer 2007
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Portfolio Rebalancing in Theory and Practice
Yesim Tokat, Nelson W Wicas
The Journal of Investing May 2007, 16 (2) 52-59; DOI: 10.3905/joi.2007.686411

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Portfolio Rebalancing in Theory and Practice
Yesim Tokat, Nelson W Wicas
The Journal of Investing May 2007, 16 (2) 52-59; DOI: 10.3905/joi.2007.686411
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