Rebalancing 2.0-A Macro Approach to Portfolio Rebalancing

University essay from KTH/Matematisk statistik

Abstract: Portfolio rebalancing has become a popular tool for institutional investors the last decade. Adaptive asset allocation, an approach suggest by William Sharpe is a new approach to portfolio rebalancing taking market capitalization of asset classes into consideration when setting the normal portfolio and adapting it to a risk profile. The purpose of this thesis is to evaluate the traditional approach of portfolio rebalancing with the adaptive one. The comparison will consist of backtesting and two simulation methods which will be compared computationally measuring time and memory usage (Monte Carlo and Latin Hypercube Sampling). The comparison was done in Excel and in R respectively. It was found that both of the asset allocation approaches gave similar result in terms of the relevant risk measurements mentioned but that the traditional was a cheaper and easier alternative to implement and therefore might be more preferable over the adaptive approach from a practical perspective. The sampling methods were found to have no difference in memory usage but Monte Carlo sampling had around 50% less average running time while at the same time being easier to implement.

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