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 
...