assets more correlated , larger asset corrider???

CFA Level III
#1

is the positive relationship between the assets correlations with the corrider??? more related, larger corrider??? why

#2

Everything is positively Correlated with Corridor Width EXCEPT for Volatility. So if Volatility Increase, Corridor width Decreases (narrower). Volatility I believe is the only one that has an Inverse relationship.

#3

http://www.analystforum.com/phorums/read.php?13,734654 volatility of the other assets in the portfolio as well.

#4

Yes, sorry I mean Volatility in General, so yes any volatiliyt :slight_smile:

#5

If the assets are +vely correlated you know over time they will move in tandem so you can set the corridors wideer. If you set it too narrower you incur transaction costs that can be advoided

#6

bigwilly Wrote: ------------------------------------------------------- > Everything is positively Correlated with Corridor > Width EXCEPT for Volatility. So if Volatility > Increase, Corridor width Decreases (narrower). > Volatility I believe is the only one that has an > Inverse relationship. not risk aversion. bigger risk aversion, smaller corridor.

#7

I think this is incorrect. If assets are highly positively correlated, the weightings can be revisited LESS OFTEN than their individual volatililties would suggest; because the assets increase or decrease together, their weightings are more stable than their values. This IS NOT, as I read it, an argument for a larger or smaller corridor.

#8

Further thoughts on this?

#9

well…risk aversion goes hand in hand with volatility… bigwilly hit the nail on the head with this.

#10

CFA city - you’re thinking too deep i believe - what we’re for the exam supposed to analyze is variables in isolation - volatility, correlation, risk aversion etc. so although correlation and volatilty might offset each other somewhat, for this exercise we’re not interested in how the variables interact. we just need to know that higher volatility = smaller corridor; higher risk aversion = smaller corridor, larger correlation = bigger corridor. and when you say weightings and values you’re basically saying the same thing as we’re talkign about asset classes and not individual assets. so if i have a $100 portfolio with $60 in equity or an allocation of 60%, its saying the same thing two ways. semantics.