Rebalancing with transaction costs: theory, simulations, and actual data

Abstract In the absence of transaction costs and presence independent returns, a buy-and-hold strategy theoretically generates higher expected returns than fixed-weight strategy, where portfolio weights are regularly readjusted/rebalanced to some initial level. This return comes with volatility. The resulting trade-off leads different rankings Sharpe ratio depending on statistical moments assets. We also focus Maximum Drawdown. discuss causes affecting ranking ratio, we introduce an easy-to-implement methodology deal proportional costs. Under costs, as cheaper approach should be winner. various simulation experiments, investigate relevance rebalancing strategies. Eventually, consider several realistic portfolios risk-free asset, bonds, stock indices, commodities real estate that allow us demonstrate in practice has value.