If a corridor for equities is 40% +/- 10%, does this mean rebalance to 40% if it moves below 30 and above 50 or if it moves above 44% and below 36%
Is it the % of the % ot absolute amount?
44 36 unless state otherwise
If given as 40% with +/- 10%, then the answer is 36%-44%
If given as 40% with +/- 4%, then the answer is 36%-44%
you have to look at it in context…
Ha wat?
Not so sure about this. I think you are thinking of how to set the corridor widths in the first place:
" The corridors were set according to a formula based on a percentage of the target allocation, target ± (target allocation × P%), where P% was 10% (but could be another percentage such as 5%). Following that formula, a corridor of 45% ± (45% × 10%) = 45% ± 4.5% applied to domestic stocks, 15% ± 1.5% applied to international equities, and 40% ± 4% applied to domestic bonds. However, ad hoc approaches such as this one are open to several criticisms. The approach illustrated does not account for differences in transaction costs in rebalancing these three asset classes, for example. " (Institute 88) Institute, CFA. Level III 2013 Volume 6 Portfolio: Execution, Evaluation and Attribution, and Global Investment Performance Standards. John Wiley & Sons (P&T), 6/18/2012. .
To answer the original question:
“For example, if the target proportion for an asset class is 40 percent of portfolio value, trigger points could be at 35 percent and 45 percent of portfolio value. We would say that 35 percent to 45 percent (or 40% ± 5%) is the corridor or tolerance band for the value of that asset class.” (Institute 87) Institute, CFA. Level III 2013 Volume 6 Portfolio: Execution, Evaluation and Attribution, and Global Investment Performance Standards. John Wiley & Sons (P&T), 6/18/2012. .
ok so in my original question, if equities moved to 35% or 45% we would not rebalance?
actually if you look at 2010 AM mock #8A, they use the % of the optimal weight.
I think there is a difference if it is % of portfolio or % of weight
andy, still hitting the mocks hard huh? You are correct, book says a variation to “Percentage of Portfolio” is to use a “Percentage of Target Allocation”.
At this point skimming my notes and this seemingly simple question came up and I recalled it being on a mock. Just trying to avoid dumb errors like not calculation 10% of 50% properly.
Yeah I was looking at this mock today as well, and was confused, because I read it as in ± 10%, as in the international could be anywhere within 20-40. I thought that was an incredibly large corridor, but I just took it as it was given. Reading this, now I understand why, because the guideline answer gives absolutely no help.
So when the optimal allocation is 30%, and we get ±10%, I will know that it’s actually 3% either way (10% of the 30%), which makes waaaaay more sense.
Yea, common sense overrules on this one. It’s hard to discern the corridor widths with higher allocations. Much easier for a 5% allocation with +/- 10%.