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Principles of Quantitative Equity Investing: A Complete Guide to Creating, Evaluating, and Implementing Trading Strategies by Sugata Ray

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8. Rebalancing—Why, How, and How Often

Rebalancing is the process by which the stocks in a screen are closed out at the end of your strategy’s horizon and the proceeds are reinvested into the stocks in the screener for the following period. The basic tension in deciding how often to rebalance is that the more frequently you rebalance, the more you trade—and the higher your costs are. The benefit of more frequent rebalancing is that your positions are based on fresh information.

Costs of Rebalancing More Frequently

Costs of rebalancing are most often either financial costs (for example, paying your brokerage firm a commission to trade stocks) or labor costs (for example, logging in and executing all the transactions needed to rebalance your portfolio). ...

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