Journal of Applied Finance & Banking

Portfolio rebalancing versus buy-and-hold: A simulation based study with special consideration of portfolio concentration

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  • Abstract 

    The aim of this study is not only to explore if portfolio rebalancing can lead to a better performance compared to a buy-and-hold (B&H) strategy but to find out if there is a correlation between the weight-based concentration of the B&H portfolio and the success of a rebalancing strategy. For these reasons, it is firstly discussed how rebalancing affects portfolio diversification, risk-adjusted return and the utility value for a certain investor. Secondly, it is discussed on what the portfolio weight of a special stock is depending on whereas the cases of an initially equally and unequally weighted portfolio are distinguished. The latter one has a larger weight concentration which is determined by the normalized Herfindahl index and the coefficient of variation. These issues are explored theoretically and empirically. In the empirical analysis the Monte Carlo simulation is used which is based upon 1,000 simulations with 520 generated returns for each of the 15 assumed stocks in the initially equally weighted portfolio. The results show that the diversification ratio, the return to risk ratio, and the utility value of the rebalanced portfolio turn out to be significantly greater than those of the B&H portfolio. The rebalanced portfolio has a slightly (not significant) positive rebalancing return. Finally, a strong negative correlation between the rebalancing return and the weight concentration of the B&H portfolio is found.

    JEL classification numbers: G11
    Keywords: portfolio rebalancing, rebalancing return, buy-and-hold, diversification ratio, return to risk ratio, utility value, portfolio concentration, autocorrelation

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