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The parameter sensitivity of the Margrabe Best-of-two strategy Giang Nguyen The Margrabe Best-of-two strategy is a rule-based dynamic investment solution for the two-asset allocation problem. Its typical implementation involves yearly rebalancing the portfolio weights to 50-50 at the beginning of the year. While the yearly rebalancing corresponds to a reversal trade, the intra-year weight adjustments chase the momentum of the best performing asset by replicating the value of Margrabe option to exchange an asset for another. In practice, this means that the Margrabe portfolio allocation depends on assets’prices, their return volatilities and correlation as well as the remaining time until year-end. In this paper, we study the sensitivity of the strategy to these input parameters, both analytically and through numeric experiments. We also report the results of an extensive out-of-sample evaluation for the bond-equity investment problem, where we compare the Margrabe Best-of-two strategy with alternative solutions to the two-asset allocation problem.