Investment Theory and Risk Management, + Website

Implications

Clearly, the magnitude of rebalancing is greater, the higher the portfolio risk or any of its components, where, again, each of these variables are period specific, for example, . It is lower, on the other hand, the higher the marginal costs of rebalancing or the higher the discount rate. Moreover, the rebalancing rate is lower for assets with more inherent volatility (captured by the Wiener process) but higher for portfolios with greater allowable drift between and . Since can be either positive or negative, then optimal rebalancing can move in either direction (as in the Leland case). There is a no-trade region as well, where and is defined by setting to zero and solving to ...