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I wanted to know if there are any mention of what is optimal lookback period i.e. how many days, weeks, months or years of return data I should consider for constructing sharpe optimal portfolio and what should be the hold period and when should the portfolio be rebalanced?

Ex. lets say if I have to make investments only for 1 month so for how many previous months returns should I take into consideration? And when should it be revised or rebalanced?

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  • $\begingroup$ You can but frankly determining the optimal lookback period is more of an art than a science - the further you lookback the more "stale" data you have, but the shorter your period the fewer samples you have to compute your estimate. Also keep in mind that the more frequently you rebalance the more issues you will have with transaction costs. $\endgroup$ – rubikscube09 Jun 3 at 14:40
  • $\begingroup$ @rubikscube09 Assuming zero transaction cost. If I were to rebalance portfolio every quarter then can't I backtest for various lookback periods like last 12 or 24 or 48 months over the last 20 years of data to find which lookback period gives me better returns on an average? $\endgroup$ – Stupid_Intern Jun 3 at 17:40
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    $\begingroup$ Using return to justify “best” look back period is spurious at best. Think about what portfolio you’re optimizing and set a look back period that captures the full market cycle. Do some research. Investopedia says the typical cycle is roughly 5 years for the whole market, but different industries have different cycles. $\endgroup$ – Mild_Thornberry Jun 4 at 13:23

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