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Boston Meeting: Optimal Rebalancing


Tuesday, April 12, 2005 - 6:15pm

3rd Floor of the Tennis & Racquet Club, 939 Boylston Street [call 617-536-4630 for directions]
Next Boston QWAFAFEW Meeting: Tuesday, 12 April 2005
Time: 6:15 PM sharpe
Location: 3rd Floor of the Tennis & Racquet Club, 939 Boylston Street
[call 617-536-4630 for directions]
RSVP to Boston@QWAFAFEW.org

a QWAFAFEW discussion led by
Walter Sun 
of MIT

Optimal Rebalancing Strategy for Institutional Portfolios

http://www.qwafafew.org/boston-sun-et-al-20050412

Abstract 

Institutional fund managers generally rebalance using ad hoc methods such as calendar basis or tolerance band triggers. We propose a different framework that quantifies the cost of a rebalancing strategy in terms of risk-adjusted returns net of transaction costs. We then develop an optimal rebalancing strategy that actively seeks to minimize that cost. We use certainty equivalents and the transaction costs associated with a policy to define a cost-to-go function, and we minimize this expected cost-to-go using dynamic programming. We apply Monte Carlo simulations to demonstrate that our method outperforms traditional rebalancing strategies like monthly, quarterly, annual, and 5% tolerance rebalancing. We also show the robustness of our method to model error by performing sensitivity analyses.

Walter Sun
MIT
77 Massachusetts Ave., 32-D570
Cambridge, MA  02142
waltsun@mit.edu

Joint work with
Ayres Fan, Li-Wei Chen, Tom Schouwenaars, Marius A. Albota, Ed Freyfogle, Josh Grover


Use this link to download the paper from the QWAFAFEW website, and this one for the handout.

Members may attend free of charge. Guests are welcome, and pay a fee of $30.
If you are not yet a member or have not paid your dues lately, you may pay your annual dues of $150 per year.
 
You may bring cash or a check for either amount ($150 or $30) made out to "QWAFAFEW" and give it to our Treasurer, Hugh Crowther 
 
Please let us know if you intend to come to the meeting.
Walk-ins are always welcome; still, we greatly appreciate all RSVPs as it aids our planning tremendously to have a fairly accurate headcount. 
 
Help needed.
We are always in need of people to arrive early for the meetings to help set up the seating and refreshments.
If you are willing to help out please contact Hugh Crowther.
 
2005 Boston QWAFAFEW Schedule
(names are Steerage Committee members in charge of the program)
 
May 17                                                    John Nagorniak
June 14 (Flag Day)                                    Evan Schulman
July 12                                                    Michael Wilcox
August 16                                             Dan diBartolomeo
 September 13                                           Jarrod Wilcox
  October 11                                           Harry Markopolos
   November 15                                                       Dan Rie 
 
One member of the Steerage Committee is responsible for coordinating each meeting.
Program suggestions from members are always welcome.
Hugh Crowther (Treasurer) and Mark Kritzman also serve in an advisory capacity on our Steerage Committee.
 
RSVP to:  Boston@QWAFAFEW.org
 
or to:
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Michael F. Wilcox, CFA, President
Alford Associates, Inc., 217 East Road, Alford, Massachusetts 01266 USA
tel: 1-413-528-8098  e-mail: michael.wilcox@alfordinc.com
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
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