“The Effects of Rebalancing Frequency on Portfolio Performance”
This research investigates how the frequency of portfolio rebalancing affects the risk and return of an investor’s portfolio. Portfolio rebalancing refers to reallocation between asset classes to match the targeted portfolio allocations. Increases or decreases in asset values over time will cause actual asset holdings to differ from targeted allocations. Popular portfolio allocations will be simulated using U.S. data on asset class returns, such as stocks and bonds, over the time period from 1926-2009. For each portfolio, a sensitivity analysis will be conducted to determine how risk and return are affected by different rebalancing frequencies. One, two, three, four and five year rebalancing frequencies will be used. For each portfolio and rebalancing period, the average return, standard deviation of return (which measures risk) and Sharpe Ratio (the standard risk-return statistic) will be calculated. The optimal rebalancing period will be the one that maximizes the Sharpe Ratio. Additionally, these portfolios and sensitivity analyses will be constructed for multiple time frames within the range of 1926-2009. Using information from multiple time frames can help assess whether the optimal rebalancing period is consistent, and account for differences in returns on different assets during different time periods. Knowing whether there is an optimal time frame to rebalance a portfolio is important for portfolio management decisions because it is a variable that managers of portfolios must consider.
How did you find your mentor for this project?
Dr. Doug Lamdin was my professor for Fundamentals of Financial Management and then later for Investments. Through these classes I developed a strong relationship with Dr. Lamdin. He has also been the mentor for other students who have participated in URCAD and I knew he would be an experienced mentor for my research.
How much time do you/will you put into this research?
Over the next year I will be spending three to five hours a week performing research and applying skills gained through academic coursework.
Do you get course credit for this work?
I enrolled in a spring course designed for independent study for economics where preliminary research was conducted to be investigated further over the next year.
How did you know this was the project you wanted to do?
I have always had an interest in portfolio management and this research project allows me to analyze historical data to develop my interests and strengthen my knowledge of the subject.
Was the Undergraduate Research Award application difficult to fill out?
I found the application to be very straightforward and manageable. The two-page limit made me consider what the real purpose of my research was going to be and really gave me a clear focus moving forward.
How much did your mentor help you with this?
I met with my mentor before beginning the application process to discuss the best way to convey my research in an understandable manner. He then helped me edit the final proposal before submission.
What is your advice to other students about getting involved in research?
That it is definitely worth it. In every major there is an opportunity for research so find something that you are passionate and want to learn more about and go for it!