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Portfolio rebalancing is the process of buying and selling assets to align your portfolio with the target asset-allocation percentages you determined in your investment plan. Over time, a portfolio can become unbalanced, or different from your target asset allocations, as various events occur. These events include changes in asset and asset class performance, changes in your personal objectives or risk-tolerance level, and the introduction of new capital or new asset classes that you think are attractive. It is important to rebalance your portfolio to ensure you are still moving toward your personal goals at a comfortable level of risk. The challenge of rebalancing is that each time you sell a security you incur transaction costs; for taxable accounts, you also create a taxable event.

While there are many different strategies for rebalancing a portfolio, the four strategies we discussed in this section are as follows: periodic-based rebalancing, percent-range rebalancing, equal-probability rebalancing, and active-risk rebalancing.

Portfolio management is the process of developing and maintaining your financial assets as a means of achieving your financial goals. Performance evaluation is the process of analyzing your portfolio’s performance with the goal of identifying your key sources of return. These two processes are somewhat complicated, but both are critical to successful investing. There are a number of accepted ways of measuring portfolio performance: the most widely used measuring tools include the Sharpe measure, the Treynor measure, and the Jensen measure. The Sharpe and Treynor measures means little in and of themselves; rather, these measures have meaning when compared to the measure of the relevant market benchmarks.

Portfolio attribution analysis is the process of separating portfolio returns into various categories based on specific indicators of portfolio performance, such as broad asset allocation, security selection, industry, currency, and trading. This analysis allows you to determine how well your portfolio is performing. While there are many different methods of performing a portfolio attribution, this section discussed only the most basic methods.


Now that you have completed this section, ask yourself the following questions:

  1. Can you select and use benchmarks?
  2. Can you rebalance the assets in your portfolio?
  3. Can you manage and evaluate your portfolio?
  4. Can you calculate risk-adjusted performance?
  5. Can you perform a portfolio attribution analysis?


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