Reading 31 of the Schweser has the below: An alternative to asset allocation rebalancing is to rebalance to the extent necessary to move asset class weights back within their corridor values. One rule that would accomplish this is to move the asset class weights halfway back to their target values. Under this rule, an asset class with a target allocation of 30% and a corridor of +/− 3% that has reached a weight of 35% in the portfolio would be reduced to 32.5% of the portfolio. But 32.5% of the portfolio is not within the corridor, since corridor is 30% +/- 3% = 29.1%-30.9%. So why do we reduce to 32.5% when it is not within the corridor?
30 +/- 3% = 27 - 33 corridor
it is now at 35 -> which is 30 + 5% -> move it halfway back - 30 + 2.5% = 32.5 < 33%
FYI
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- there are two ways of specifying the corridor
- absolute -> 30 +/- 3% = 27 - 33
- Relative = 30 +/- 3% (30%) = 29.1- 30.9 (which you did).
Okay thanks. But how can we tell if they are using absolute or relative? Text just says 30% +/- 3%…
there are a couple of problems in the text (check them out) may be not grey box - but white text – see how the make the difference so you know and recognize.
I think schweser approach is wrong here. According to CFAI text it should be balanced back to 31.5% considering absolute percentage: halfway from target(30%) and upper limit(33%) not halfway from target and current weight(35%). In CFA curriculum example, Asset Class Corridor 50% (+/-) 5% and the current weight of 57%, is rebalanced to 52.5%. halfway from target(50%) and upper limit(55%) In addition to that, sometimes you’ll never be able to get back into the corridor if you go for halfway between current and target, e.g if corridor is 50% +/- 5% and current weight is 62%, applying the ‘wrong’ method will end you up with 56% which is outside the corridor.