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Suppose I want to rebalance my portfolio each week. Do I then need weekly covariance forecasts, from some multivariate volatility model to do this? Ie. Insert the weekly covariance forecast $\Sigma_{t+5\vert t}$ into my model and calculate the weigths for the portfolio $w_{t+5\vert t}$ (ie. assume we are working with a global minimum variance portfolio).

I'm a bit confused on whether this is the "correct" way of doing it?

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  • $\begingroup$ Generally you get more "bang per buck" trying to improve returns forecasts... $\endgroup$ – steveo'america Dec 16 '20 at 22:27
  • $\begingroup$ @steveo'america You mean portfolio returns? That might be true, however, I'm just curious on whether you need multi-period ahead covariance forecast, in order to properly rebalance less often? $\endgroup$ – Pleb Dec 17 '20 at 9:45
  • $\begingroup$ I wonder if I understand the question and its motivation. If the method you are suggesting is a straightforward extension of daily rebalancing, why are you confused / what issues do you suspect? If not, how is it different from a straightforward extension and why not do the latter? $\endgroup$ – Richard Hardy Jun 16 at 12:26
  • $\begingroup$ Hi @RichardHardy. If the method you are suggesting is a straightforward extension of daily rebalancing: Exactly, it was. At the time, I was confused about whether this was the correct approach of rebalancing each week (asked the question to verify). I didn't suspect any issues, but I was skeptical. In the end, I never used any weekly rebalancing in my academical project paper and just stuck with daily rebalancing. $\endgroup$ – Pleb Jun 16 at 14:11

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