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Transaction fees and optimal rebalancing in the growth-optimal portfolio

Feng, Yu ; Medo, Matúš ; Zhang, Liang ; Zhang, Yi-Cheng

In: Physica A: Statistical Mechanics and its Applications, 2011, vol. 390, no. 9, p. 1635-1645

The growth-optimal portfolio optimization strategy pioneered by Kelly is based on constant portfolio rebalancing which makes it sensitive to transaction fees. We examine the effect of fees on an example of a risky asset with a binary return distribution and show that the fees may give rise to an optimal period of portfolio rebalancing. The optimal period is found analytically in the case of...