When there are Asset A,B,and C in a portfolio, if the volatility of asset B has increased,
how asset C’s corridor should be corrected?
I understood the example no.8 - 5) in CB Reading31 is the same as the above question…
Can anyone explain why asset class C’s corridor should be narrower?
Okay if the volatility of any of the assets classes have increased the weights of the asset classes will deviate from optimal SAA. Say Class A volatility increased causing its weight to decrease from 10% to 6% so all other classes will be deviated from their optimal weights this will cost a lot to rebalance the portfolio. Also high volatility will increase risk which make narrower corridor more suotable to highely risk averse
Awesome! Thanks a lot!