This study examines whether portfolio optimization can be effectively based on annual changes in the harmonized index of consumer prices (HICP) data. Specifically, we assess whether asset allocation based on consumer expenditure can generate superior returns compared to static or equal-weighted asset allocation. To explore this, we use consumer expenditure data from HICP statistics categorized by COICOP. Our findings indicate that this strategy outperforms a buy-and-hold benchmark by 13.32% in terms of the Sharpe Ratio and exceeds an annual equal-weighted rebalancing strategy by 3.11%. Additionally, both the Calmar and Sterling Ratios demonstrate improved performance, further reinforcing the robustness of this approach. Furthermore, a hypothetical scenario where sector weights from the end of the given year—though not yet available during the year—are used suggests even greater improvements in performance. A high-sample bootstrap simulation confirms that the observed performance differences are not random but reflect the independent effectiveness of asset allocation based on consumer expenditure trends. This result strengthens the validity of our backtesting findings, indicating that the examined strategy could generate excess returns compared to passive portfolio managment and fixed-weight rebalancing approaches. The result of the study is therefore the development of an effective portfolio rebalancing strategy.

This research explores the efficacy of rebalancing strategies in a diversified portfolio constructed exclusively with exchange-traded funds (ETFs). We selected five ETF types: short-term U.S. Treasury bonds, U.S. equities, global commodities, U.S. real estate investment trusts (REITs), and a multi-strategy hedge fund. Using a 10-year historical period, we applied a unique simulation model to generate random portfolios with varying asset weights and rebalancing tolerance bands, assessing the impact of rebalancing premiums on portfolio performance. Our study reveals a significant positive correlation (r = 0.6492, p < 0.001) between rebalancing-weighted returns and the Sharpe ratio, indicating that effective rebalancing enhances risk-adjusted returns. Support vector regression (SVR) analysis shows that rebalancing premiums have diverse effects. Specifically, equities and commodities benefit from rebalancing with improved risk-adjusted returns, while bonds and REITs demonstrate a negative relationship, suggesting that rebalancing might be less effective or even detrimental for these assets. Our findings also indicate that negative portfolio rebalancing returns combined with positive rebalancing-weighted returns yield the highest average Sharpe ratio of 0.4328, highlighting a distinct and reciprocal relationship between rebalancing effects at the asset and portfolio levels. This research highlights that while rebalancing can enhance portfolio performance, its effectiveness varies by asset class and market conditions.

Portfolio diversification is an accepted principle of risk management. When constructing an efficient portfolio, there are a number of asset classes to choose from. Financial innovation is expanding the range of instruments. In addition to traditional commodities and securities, other instruments have been added. These include cryptocurrencies. In our study, we seek to answer the question of what proportion of cryptocurrencies should be included alongside traditional instruments to optimise portfolio risk. We use VaR risk measures to optimise the process. Diversification opportunities are evaluated under normal return distributions, thick-tailed distributions, and asymmetric distributions. To answer our research questions, we have created a quantitative model in which we analysed the VaR of different portfolios, including crypto-diversified assets, using Monte Carlo simulations. The study database includes exchange rate data for two consecutive years. When selecting the periods under examination, it was important to compare favourable and less favourable periods from a macroeconomic point of view so that the study results can be interpreted as a stress test in addition to observing the diversification effect. The first period under examination is from 1 September 2020 to 31 August 2021, and the second from 1 September 2021 to 31 August 2022. Our research results ultimately confirm that including cryptoassets can reduce the risk of an investment portfolio. The two time periods examined in the simulation produced very different results. An analysis of the second period suggests that Bitcoin’s diversification ability has become significant in the unfolding market situation due to the Russian-Ukrainian war.

The portfolio theory, which originated in the 1950s, pointed out that portfolio diversification allows investors to reduce risk. However, in addition to sector diversification, geographical diversification has been considerably less emphasized in equity investment evaluation. Our study contributes to this area. The calculations were conducted over two periods: 2008–2013 and 2014–2019. We constructed our portfolio using only exchange-traded funds (ETFs). We created two portfolios: one geographically diversified and the other focused exclusively on European markets. The geographically diversified portfolio comprised the IEV (iShares Europe ETF), EWH (iShares MSCI Hong Kong ETF), and EWZ (iShares MSCI Brazil ETF) portfolios. For our analysis, we used an approach based on the Monte Carlo simulation. The simulation calculated the Sharpe ratio of the portfolios, annualizing the metrics using the 252 trading day approach. We performed 10,000 iterations to ensure the robustness and reliability of our model. In the first period (2008–2013), we found that the geographically diversified portfolio showed higher volatility and generally lower risk-adjusted returns than the non-geographically diversified portfolio focused on Europe. Conversely, in the second period (2014–2019), the geographically diversified portfolio outperformed the non-geographically diversified portfolio in terms of risk-adjusted returns, suggesting that geographic diversification is preferable in certain market environments, particularly during periods of economic growth. In conclusion, investors should explore the potential of geographic diversification.