Narrow Corridor

CFA Level III
#1

Just confirming - we should have a narrow corridor if: Correlation is Low Transaction Costs are Low Volatility is High

#2

yeah only volatility related stuff is different than others… I dont know which one is which though, since it doesnt make much sense to me

#3

sounds about right

#4

Correlation high=narrow corridor Volatility high=narrow corridor Transaction cost high = wider corridor Risk tolerance high= wider corridor volatility of rest of portfolio high = narrow corridor.

#5

^WRONG Correlation High - WIDER

#6

shoiho Wrote: ------------------------------------------------------- > Correlation high=narrow corridor wrong high correlation = higher corridor > Volatility high=narrow corridor > Transaction cost high = wider corridor > Risk tolerance high= wider corridor > volatility of rest of portfolio high = narrow > corridor.

#7

Correlation High = Narrow ? shoiho Wrote: ------------------------------------------------------- > Correlation high=narrow corridor > Volatility high=narrow corridor > Transaction cost high = wider corridor > Risk tolerance high= wider corridor > volatility of rest of portfolio high = narrow > corridor.

#8

thanks, Bigwilly. Only high volatility gives narrower corridor. same questions from last year’s exam…

#9

what’s the final say about correlation?

#10

low correl -> decrease the barrier high correl-> increase the barrier…

#11

High correlation = wider corridor

#12

High correlation w/ other assets - wider

#13

the part i’m mssing…when correlation is high, asset values move together in relatively same proportions so there is little need to rebalance. If there is little need to rebalance, why would we set a wide corridor? anyone?

#14

you set wider corridor because portfolio is self rebalancing (in a sence) if you set very tight corridor and one asset moves and the other asset hadn’t had a chance to react, you will have to rebalance and pay transaction costs; where if you would wait a bit (as a function of wider corridor) and allowed higher correlation to kick in, the portfolio would self rebalance itself and you would avoid paying transaction costs

#15

Since they move togather, we don’t need to curb too tight.

#16

You are the man. If I could give out CFAs, I would hand one over to you. But of course, I just commited a violation by saying “CFAs”, so I guess I’m in no position to do so. In any case, you are the man. volkovv Wrote: ------------------------------------------------------- > you set wider corridor because portfolio is self > rebalancing (in a sence) > > if you set very tight corridor and one asset moves > and the other asset hadn’t had a chance to react, > you will have to rebalance and pay transaction > costs; where if you would wait a bit (as a > function of wider corridor) and allowed higher > correlation to kick in, the portfolio would self > rebalance itself and you would avoid paying > transaction costs

#17

thanks volkovv and foxie… seems to me the “avoiding transaction costs” argument is best served when correlations are low. I guess I expected the answer to be different if you have high correlations vs. low correlations. So regardless, we set corridor wider.