Statement 3 is incorrect. Rebalancing ranges for non-US developed equity
should be wider than US equity under the cost-benefit (not proportional range)
because it has higher transaction costs. Rebalancing ranges under the
proportional range approach are defined as +/– 600 basis points for all asset
classes in this example and are computed as follows.
Rebalancing ranges for bonds under the proportional range approach:
20% × (1 + 600 bps) = 20% × 1.06 = 21.2%
20% × (1 – 600 bps) = 20% × 0.94 = 18.8%
- How do we know that there are higher T costs for non-US developed equity? Or is it more of an assumption, than a certainty, to explain the wider range?
- How do we calculate the Cost-Benefit range?
- By the way, would Statement 3 have been correct if the range was narrower?
i.e. Statement 3: Rebalancing ranges for non-US developed equity should be narrower than US equity under the proportional range approach because it has a higher currency risk.
Many thanks and have a good day,