I have reached a point where I could no longer understand it in the chapter Monitoring & Rebalancing.
In constant-mix strategy, you sell the appreciated value and buy the depreciated value…that’s okay and understood.
How come in this strategy the amount of cash invested in risky asset increases as wealth goes up? I think it goes down, no?
Thanks for help!
What is leading you to this conclusion? I didn’t see this directly stated in the curriculum. We’d probably need some reference, but I assume you read this in Schweser’s notes and might be misinterpreting something.
But from what you stated, sure, the AMOUNT of wealth invested in the risky asset (stocks) would increase as wealth increases, as it’s a constant mix. The target investment in stocks is m x Portfolio Value, where 0 < m < 1. However, the PERCENTAGE of wealth invested in stocks remains the same (at each rebalancing point).
Suppose you have 100 60 invested in equity and 40 in cash, assume your portfolio goes up to 120 ie 80 equity and 40 cash in constant mix you will rebalance to the same 60/40 ratio, therefore you will sell equity worth 8 and invest in cash ie 8 you will have 72 in equities and 48 in cash. Your investment in equity has increased from 60-72 but your portfolio is still 60/40 maintained.