Could someone please explain with an intuitive example?
Ahhhh thats a good one.
Say you have a balanced portfolio of 60/40 w/ Stocks & Bonds and they are Highly Correlated. When one moves, the other does as well and thus no need to have narrow corridors as they are both highly correlated and they will remain @ the same weights (assuming, for our purposes a correlation of 1)
If however, they are not highly correlated (Correlation of 0) a move in Stocks of 50% (And no move in bonds since low correlation) would cause the portfolio to be misaligned to its target. Since the Stock moved, now the portfolio is 75% stocks / 25% bonds as a simple portfolio of lets say $1000 with an investment of $600 Stx / $400 Bnds) would cause the stock portion to go to $900 (50% move in stocks ) and if the bonds stay flat, $400) $900 Stx, $400 Bonds = 75% allocation to stocks and 25% to Bonds. Therefore, need narrower corridors to rebalance to target.
Hope this helps.
If the assets in your portfolio are highly correlated, the change in market dynamics will cause the value of your portfolio to move in the same direction, and if the market is volatile, then there is the likelihood that your portfolio value will increase or decrease beyond a narrow threshold, and thus why wider threshold is preferred.