Buy-and-hold versus (daily) rebalancing

The choice of investment matters, even when the underlying risky assets are similar. As an example, you will now consider the stock price of Apple and Microsoft from January 2006 until the end of August 2016. The time series plot shows you the value evolution of one dollar invested in each of them.

For this exercise, your portfolio approach will be to invest half of your budget in Apple stock, and the other half of your budget in Microsoft stock. Over time, the portfolio weights will change. You will have two choices as an investor. The first choice is to be passive and not trade any further. This is called a buy and hold strategy. The second choice is to buy and trade at the close of each day that results in a rebalance of the portfolio such that your portfolio is equally invested in shares of Microsoft and Apple. This is a rebalanced portfolio.

Which of the following statements is false?

Possible answers

By investing in a portfolio of risky assets, the portfolio payoff will be in between the minimum and maximum of the payoff of the underlying risky assets.

By investing in a portfolio of risky assets, the risk of the portfolio payoff will be less than the maximum risk of the underlying risky assets.

An investor needs to have a lot of capital to be able to invest in a portfolio of many assets.

Because the prices of Microsoft and Apple have evolved differently, the investor who spent initially half of his wealth on Microsoft and Apple ends up with a portfolio that is no longer equally invested.

Exercise

Buy-and-hold versus (daily) rebalancing

Instructions

Possible answers