Work Harder: Diligent Rebalancing and Investment Horizon

摘要

In an age of constant information flow, investors have to strike the right balance between incorporating incremental information into a portfolio and managing turnover before the end of the investment horizon. Using a tractable yet realistic model of asset and signal dynamics, the authors provide analytical rigor to justify the optimality of the common practice of updating investment views and portfolio positions as new information arrives. In analyzing different approaches to rebalancing, their results indicate that regularly updating the conditional information set achieves a higher information ratio than either waiting to rebalance until after the investment horizon is reached or using regular rebalancing based on a moving average of the past information set. The authors provide guidance on turnover management in conjunction with the information horizon of the signal.