What type of return does a portfolio achieve through rebalancing?

What type of return does a portfolio achieve through rebalancing?

• A. Purely capital gains
• B. Supervised risk-adjusted returns
• C. Enhanced average geometric mean return
• D. Maximum risk potential

Answer: (C)

The type of return a portfolio achieves through rebalancing is an enhanced average geometric mean return. Rebalancing a portfolio involves realigning its asset allocation back to target levels, which can often lead to buying undervalued assets and selling overvalued ones. This process can improve the risk-return profile of the portfolio over time, as it typically causes the investor to sell high and buy low, capitalizing on variations in market prices. The enhanced average geometric mean return reflects the compounded growth rate of the investment, as rebalancing helps maintain a more optimal risk-return relationship, potentially increasing the overall performance of the portfolio over the long term. The geometric mean return is particularly important because it accounts for the effects of compounding, which means that achieving higher returns in some periods and lower in others can lead to an overall better performance than simply averaging arithmetic returns. Effective rebalancing can therefore lead to higher geometric mean returns compared to a static allocation strategy.

The type of return a portfolio achieves through rebalancing is an enhanced average geometric mean return. Rebalancing a portfolio involves realigning its asset allocation back to target levels, which can often lead to buying undervalued assets and selling overvalued ones.

This process can improve the risk-return profile of the portfolio over time, as it typically causes the investor to sell high and buy low, capitalizing on variations in market prices. The enhanced average geometric mean return reflects the compounded growth rate of the investment, as rebalancing helps maintain a more optimal risk-return relationship, potentially increasing the overall performance of the portfolio over the long term.

The geometric mean return is particularly important because it accounts for the effects of compounding, which means that achieving higher returns in some periods and lower in others can lead to an overall better performance than simply averaging arithmetic returns. Effective rebalancing can therefore lead to higher geometric mean returns compared to a static allocation strategy.