Dynamic rebalancing
Dynamic rebalancing is a process of keeping one's portfolio closer to your allocated target using the natural cash inflows and outflows to your portfolio. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation, realigning the weightings of a portfolio of assets.
Let us consider an example. In a portfolio, the target asset allocation was 40% stocks and 60% bonds. If the bonds performed well during the period, the weights of bonds in the portfolio could result to 70%. Then, the investor will decide to sell some bonds and buy some stocks to get the portfolio back to the original target allocation of 40% stock and 60% bonds.
Now, let us see how to do rebalancing of the portfolio in R.
Periodic rebalancing
Let us consider data sourced from R:
>library(PerformanceAnalytics) >data(edhec) > data<-edhec["1999", 3:5] > colnames(data) = c("DS","EM","EMN") > data ...