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Computing optimal rebalance frequency for log-optimal portfolios

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  • Sujit R. Das
  • Dmitri Kaznachey
  • Mukul Goyal

Abstract

Log-optimal investment portfolio is deemed to be impractical and cost-prohibitive due to inherent need for continuous rebalancing and significant overhead of trading cost. We study the question of how often a log-optimal portfolio should be rebalanced for any given finite investment horizon. We develop an analytical framework to compute the expected log of portfolio growth when a given discrete-time periodic rebalance frequency is used. For a certain class of portfolio assets, we compute the optimal rebalance frequency . We show that it is possible to improve investor log utility using this quasi-passive or hybrid rebalancing strategy. Simulation studies show that an investor shall gain significantly by rebalancing periodically in discrete time, overcoming the limitations of continuous rebalancing.

Suggested Citation

  • Sujit R. Das & Dmitri Kaznachey & Mukul Goyal, 2014. "Computing optimal rebalance frequency for log-optimal portfolios," Quantitative Finance, Taylor & Francis Journals, vol. 14(8), pages 1489-1502, January.
    • Handle: RePEc:taf:quantf:v:14:y:2014:i:8:p:1489-1502
    DOI: 10.1080/14697688.2014.887219
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    Cited by:

    1. Sujit R. Das & Mukul Goyal, 2015. "Computing optimal rebalance frequency for log-optimal portfolios in linear time," Quantitative Finance, Taylor & Francis Journals, vol. 15(7), pages 1191-1204, July.
    2. Chung-Han Hsieh & John A. Gubner & B. Ross Barmish, 2018. "Rebalancing Frequency Considerations for Kelly-Optimal Stock Portfolios in a Control-Theoretic Framework," Papers 1807.05265, arXiv.org, revised Aug 2018.
    3. Chung-Han Hsieh, 2021. "On Asymptotic Log-Optimal Buy-and-Hold Strategy," Papers 2103.04898, arXiv.org.
    4. Chung-Han Hsieh & B. Ross Barmish & John A. Gubner, 2019. "The Impact of Execution Delay on Kelly-Based Stock Trading: High-Frequency Versus Buy and Hold," Papers 1907.08771, arXiv.org.
    5. Chung-Han Hsieh, 2020. "Necessary and Sufficient Conditions for Frequency-Based Kelly Optimal Portfolio," Papers 2004.12099, arXiv.org.

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