Do Under-Managed Portfolios Outperform Over-Managed Portfolios?

Hamid Z Ahmadi,Rafiqul B Rafiq,Janna Khoroujik

doi:10.19030/jber.v5i4.2538

Abstract

How often should a portfolio be rebalanced?&nbsp; This is the question our study attempts to answer.&nbsp; The Internet stock bubble and its aftermath made portfolio mangers very sensitive to their management styles.&nbsp; Specifically, they had to reassess how often to evaluate a client&rsquo;s portfolio.&nbsp; This work examines the performance of portfolios that were aggressively managed and compares their risk-adjusted returns with those of portfolios that were managed infrequently.&nbsp; To accomplish this, we change the rebalancing frequency of a well-diversified portfolio and track its performance over time.&nbsp; This study will not only enable us to determine whether the performance of an actively-managed portfolio surpasses the performance of an under-managed or unmanaged portfolio, but it will also allow us to determine the optimal rebalancing period for maximizing risk-adjusted returns.&nbsp; The asset selection and portfolio optimization methodologies applied to the portfolios in this study are identical to maintain consistency and comparability of results.&nbsp; To evaluate the performance of each portfolio, we used daily observations from September 2000 to September 2006 and applied various rebalancing frequencies using the QuantAnalysis application at www.fundsformation.com.

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