Ch.10 · Risk Measures and Ratios · medium

What is 'portfolio rebalancing' and why does it affect returns?

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EXPLANATION

Portfolio rebalancing involves selling appreciated assets and buying underperforming ones to restore target allocation. While necessary for risk management, it incurs transaction costs that slightly reduce returns. High turnover from frequent rebalancing can meaningfully erode performance, which is why lower portfolio turnover is generally preferred for cost-efficient management.

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