Rebalancing Individual National Markets
- Topics:
- Commercial Lending
- Source:
- William J. Bernstein
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Overview: The author of the article examined the returns and risks of rebalancing asset classes in a global portfolio. It provides the guiding principles for those who are unfamiliar with the basics: 1. Rebalancing benefit is driven by low asset correlations and high asset volatility. The more volatile the asset and the lower the correlation with the rest of your portfolio, the better. 2. The more similar your asset returns, the better. If the returns of one asset are regularly higher than another then it is quite possible to lose money rebalancing. It talks about a question that why the difference in rebalancing effects between the emerging and developed markets? First, the volatility of the emerging markets is much higher than the developed markets, with SDs averaging about 50%. Since the rebalancing bonus is proportional to the variance of the asset, a doubling of SD results in a quadrupling of variance, and thus of rebalancing benefit. Second, correlations are much lower in the emerging markets arena—typically about half of those in the developed world, providing yet another margin of benefit.
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Format: HTML | Date: Jan 2003 | Pages: 1
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