Style index rebalancing for better diversification
lessons from broad market and equity styles
DOI:
https://doi.org/10.61190/fsr.v18i3.4948Keywords:
Portfolio, Diversification, Rebalancing, Asset allocation, Index & IndicesAbstract
We explore the effectiveness of rebalancing approaches by examinging the performance if both time-based and various asset-level-based triggers using equially weighted portfolios comprised of six equity style indexes. Although either form of style rebalancing attains superior performance (both absolute and risk-adjusted) over a naive, buy and hold approach, we find trigger-based rebalancing results to be marginally superior. We also note that both the inability to rebalance asset allocation within a traditionally indexed equity investment fund as well as intermediate-term variability in size and style performance combine to dispel the widespread belief that investors can achieve adequate diversification soley through broad-market index holdings.
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