2009 CFA exam Q10 A

Could somebody please explain the CFAI resoning for unchanged corridor width with increase in price of gold?

The question mentions forecasts for not only gold price but also for Tx cost and volatilty.

If I remember correctly, it was only that there was a forecast for gold to increase in price, and they had not actually seen the increase in price or additional volatilty. So don’t need to change the corridor.

Because they ask you whether the corridor width should be changed or not. It is difference with do rebalancing or not ?

If the gold price increases big enough, you do rebalancing…not change the corridor width.

Yeah, factors affecting Optimal corridor width are:

  1. Volatilityof the asset class, volatility of the rest of the portfolio

  2. Transaction cost (liquidity)

  3. Correlation

Price is not in the list…Price increase/decrease may call for portfolio rebalancing…

Hi rahul,

If the volatility of the rest of the portfolio is high, do we have a narrower band width?


please explain if there is any difference between Volatility of the asset class and volatility of the rest of the portfolio concepts for deciding optimal corridor width?

The rule which I follow and it works 99% of the time.

Increase Corrolation = Increase Corridor

Increase Trans Cost = Increase Corridor

Increase volatility = decrease corridor

:slight_smile: works perfect.