Rebalancing
Adjusting portfolio weights back to target allocations.
Rebalancing is the process of realigning portfolio weights to desired targets after market movements cause drift. For example, if equities outperform bonds, the equity allocation may exceed the target, requiring selling equities and buying bonds to restore balance. Rebalancing enforces discipline and can capture a 'rebalancing premium' from systematically buying low and selling high.
Asset Allocation
How a portfolio is divided across asset classes — the primary driver of returns.
Efficient Frontier
The set of portfolios offering the highest return for each level of risk.
Sharpe Ratio
Risk-adjusted return: excess return divided by volatility.
Covariance Matrix
Captures how asset returns move together — the foundation of diversification.
Portfolio Volatility
Standard deviation of portfolio returns — total risk including diversification effects.
Minimum Variance Portfolio
The portfolio with the lowest possible volatility.