### When Rebalancing Works?

**February 21, 2014** - Strategic Allocation, Volatility Effects

Under what conditions is periodic rebalancing a successful “volatility harvesting” strategy? In his February 2014 paper entitled “Disentangling Rebalancing Return”, Winfried Hallerbach analyzes the return from periodic portfolio rebalancing by decomposing its effects into a volatility return and a dispersion discount. He defines:

- Rebalancing return as the difference in (geometric) growth rates between periodically rebalanced and buy-and-hold portfolios.
- Volatility return as the difference in growth rates between a periodically rebalanced portfolio and the equally weighted average growth rate of its component assets.
- Dispersion discount as the difference in growth rates between a buy-and-hold portfolio and the equally weighted average growth rate of portfolio assets.

Based on mathematical derivations with some approximations, *he concludes that:* Keep Reading