@article {Sun16, author = {Walter Sun and Ayres Fan and Li-Wei Chen and Tom Schouwenaars and Marius A. Albota}, title = {Using Dynamic Programming to Optimally Rebalance Portfolios}, volume = {1}, number = {2}, pages = {16--27}, year = {2006}, doi = {10.3905/jot.2006.628191}, publisher = {Institutional Investor Journals Umbrella}, abstract = {The authors propose a different framework that quantifies the cost of a rebalancing strategy in terms of risk-adjusted returns net of transaction costs. They then derive an optimal rebalancing strategy that actively seeks to minimize that cost. Certainty equivalents and the transaction costs associated with a policy to define a cost-to-go function are used, with the expected cost-to-go minimized using dynamic programming. They apply Monte Carlo simulations to demonstrate that their method outperforms traditional rebalancing strategies like monthly, quarterly, annual, and 5\% tolerance rebalancing. They also show the robustness of our method to model error by performing sensitivity analyses.TOPICS: Simulations, portfolio construction, performance measurement}, issn = {1559-3967}, URL = {https://jot.pm-research.com/content/1/2/16}, eprint = {https://jot.pm-research.com/content/1/2/16.full.pdf}, journal = {The Journal of Trading (Retired)} }