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Expected utility and the non-normal returns of common portfolio rebalancing strategies

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  • Samuel Kyle Jones

    (Stephen F. Austin State University)

  • Joe Bert Stine

Abstract

This study compares three common strategies: buy-hold, constant mix and constant proportion rebalancing separately for bull, bear and trendless markets using Monte Carlo simulation. These strategies are compared in terms of terminal wealth, risk and expected utility. Our results indicate that rankings of the strategies by general expected utility functions, defined across all moments of the distribution of terminal wealth, often differ from rankings by mean-variance statistics. As rebalancing can produce non-normal payoffs, relying purely on traditional mean-variance analysis may cause investors to select inappropriate rebalancing strategies.

Suggested Citation

  • Samuel Kyle Jones & Joe Bert Stine, 2010. "Expected utility and the non-normal returns of common portfolio rebalancing strategies," Journal of Asset Management, Palgrave Macmillan, vol. 10(6), pages 406-419, February.
    • Handle: RePEc:pal:assmgt:v:10:y:2010:i:6:d:10.1057_jam.2009.22
    DOI: 10.1057/jam.2009.22
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    References listed on IDEAS

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    Cited by:

    1. Hubert Dichtl & Wolfgang Drobetz & Martin Wambach, 2014. "Where is the value added of rebalancing? A systematic comparison of alternative rebalancing strategies," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 28(3), pages 209-231, August.
    2. Frieder Meyer-Bullerdiek, 2018. "Portfolio rebalancing versus buy-and-hold: A simulation based study with special consideration of portfolio concentration," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(5), pages 1-4.
    3. Giulia Dal Pra & Massimo Guidolin & Manuela Pedio & Fabiola Vasile, 2016. "Do Regimes in Excess Stock Return Predictability Create Economic Value? An Out-of-Sample Portfolio Analysis," BAFFI CAREFIN Working Papers 1637, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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