Saturday, April 14, 2012

Rebalancing

Rebalancing refers to the process by which a portfolio is brought back to its original asset allocation following a period of varying performance of assets which results in a deviation of weights from the original policy mix. The purpose of portfolio rebalancing is to restore the portfolio to its original mix; which is intended to maintain its original expected risk and return profile. If rebalancing is not done then the portfolio will take on different characteristics from when it was first put in place. Rebalancing strategies can be based on time e.g. every month/quarter/year, or threshold e.g. when portfolio weights deviate by more than 1%/5%/10% from the policy weight; or a combination of time and threshold. Rebalancing can add to returns, but it is typically thought of as a risk management strategy. Rebalancing will often involve selling the highest performing assets and investing into the lowest performing assets; and thus can be characterized as a contrarian strategy.

Similar Fund Terms: Reweighting, Tactical Asset Allocation, Asset Allocation

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1 comment:

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