Mark Kritzman, Simon Myrgren and Sébastien Page
Volume 7, Number 1, First Quarter 2009
Institutional investors usually employ mean-variance analysis to determine optimal portfolio weights. Almost immediately upon implementation, however, the portfolio’s weights become sub-optimal as changes in asset prices cause the portfolio to drift away from the optimal targets. We apply a quadratic heuristic to address the optimal rebalancing problem, and we compare it to a dynamic programming solution as well as to standard industry heuristics. The quadratic heuristic provides solutions that are remarkably close to the dynamic programming solution. Moreover, unlike the dynamic programming solution, the quadratic heuristic is scalable to as many as several hundreds assets.