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Quantitative Equity Portfolio Management by Daehwan Kim, Ludwig B Chincarini

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CHAPTER 10Rebalancing and Transactions Costs

Changes aren’t permanent, but change is.

—Neil Peart

10.1 INTRODUCTION

In October 2000, the Texas Permanent School Fund rebalanced its portfolio of more than 2000 securities. The rebalancing project involved over 40 portfolio managers, 500 million shares, and about $17.5 billion. The cost? Not including administrative costs, the transactions themselves cost $120 million.1 While the Texas Permanent School Fund’s rebalancing magnifies the problem considerably, the lesson applies to funds of all sizes: managers cannot afford to ignore transactions costs.

Almost all portfolios need to be adjusted during their lifetimes, so incurring periodic transactions costs is inevitable—it is simply a question of how ...

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