Benefits of rebalancing?

A testable piece…

Assuming your strategic asset allocation provides you with your optimal, risk-adjusted expected returns subject to your constraints, then rebalancing ensures that your actual allocation will achieve these returns and not result in an overall portfolio with an undesired risk-return profile or that violates your constraints.

It also enforces a “buy low-sell high” methodology since when a given allocation gets too high due to rising prices, you lower the allocation by selling off the gainers (and vice versa for the losers in a declining allocation).


rebalancing to target weights would

[1]Reduce the present value of expected losses from not tracking the optimum

[2]control for portfolio risk (assets with high volatility->high return->large portion of portfolio->portfolio variance drift)

[3]control risk exposure drift (rebalancing allows us to maintain desired exposure to market risk for example)

[4]NOT rebalancing may result in ownership of overvalued securities->possible future losses.

rebalancing portfolio weights to be within the allowed range implies:

[1] Less close alignment to target weights than rebalancing to target weights.

[2] Lower T-Costs.

[3] More leeway for active managment.

[4] Lower costs associated with managing the weights of illiquid assets.