percentage of portfolio rebalancing

CFA Level III
#1

if one of the assets increase over its corridor width what do we do?

a rebalance the asset only back to the optimal

b) rebalance the asset only bact to the the allowable corridor

c) rebalance all the assets back to the optimal level

#2

C

#3

I tihnk it is also dependent on the rebalancing method you use. The most standard is rebalance back to the original asset allocation. For some it is ok to rebalance back to within X% of the corridor.

#4

ya i rember in some cases we used to rebalance back to with the corridor and only the asset. however in a recent schweser mock the answer was rebalance everything back

#5

Percentage of portfolio rebalancing only tells you when to rebalance back. If the how is not provided, I’ll simply rebalance back to target.

#6

Option C is correct

#7

You would have to rebalance the entire portfolio. You may not have enough liquidity in the portfolio to rebalance a single asset or you may end up with too much liquidity/cash. Rebalancing one asset would also mean that another asset is likely out of proportion as well.

i.e.

My SAA dictates a 20% allocation to US LCG. The corridor is +/- absolute 5% of the target weight.

If my allocation to LCG drops to 14% then I need to buy additional exposure to LCG, but I can only do so if I generate liquidity from the sale of another asset that has appreciated or maintained in value. On the flip side, if my LCG allocation was 26% and I only rebalanced LCG I would be left with an over allocation to cash. The heavy allocation to cash would hurt my performance, but it would also mean that there is another asset that is fairly underweight it’s SAA as well.