Acta Univ. Agric. Silvic. Mendelianae Brun. 2018, 66, 1417-1430
Published online 2018-12-19

What is the True Effect of Rebalancing – A Higher Return or a Lower Risk?

Martin Boďa, Mária Kanderová

Quantitative Methods and Information Systems Department, Faculty of Economics, Matej Bel University in Banská Bystrica, Národná 1, 974 01 Banská Bystrica, Slovak Republic

The paper is motivated by the fact that rebalancing in portfolio management has an effect recognisable with both return and risk, although its purported ambition is to control (or decrease) portfolio risk. Focusing upon rebalancing strategies in quadratic tracking, the paper investigates whether rebalancing contributes to higher returns or lower risks. The investigation is conducted as a case study of tracking the S&P 500 Index by means of its constituents in four different time periods spanning from 2011 to 2017. Different approaches to stock pre‑selection (according to investment styles induced by market capitalization and the P/B ratio), portfolio nominal sizes (ranging between 10 and 30 stocks) and rebalancing (including periodic, deviation or no rebalancing at all) are considered. The results suggest that the effect of rebalancing is generally more apparent with return and less with risk, and that risk may in times of turbulent markets be aggravated by rebalancing interventions.


The support of a grant scheme of VEGA [# 1/0554/16] is acknowledged, and also usefulness of suggestions brought up by Andrea Kolková in discussing the first draft of the manuscript.


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