Rebalancing question

  1. two assets X and Y, Y vol increases, what happens to X corridor? 2) three assets X,Y and Z, X and Y corr decreases what happens to Z corridor?

if you don´t want to deviate from original allocation: 1. I would say corridor for X should be smaller, because higher movements of Y will imply higher movements of X (as weight of X = 1 - weight of Y) 2. Not sure. If now X and Y don´t move together, this means that their weights in the portfolio can change more, and weight of Z = 1 - weight of X - weight of Y. I guess corridor for Z should be smaller, too what do you think

  1. I am guessing it should be smaller, but i am not sure, as if we decrease Y corridor rebalancing will be triggered regardless, why would we decrease X corridor? 2. I am pretty sure Z corridor should be left unchanged as we can rebalance X and Y and dont touch Z
  1. Corridor should be Narrower 2) Corridor should be Wider…or was this one narrower…

willy state your reasons or CFAI/Schweser pages :slight_smile:

Its’ in my head, sorry. I just remember something stating if Vol Increases, Corridor should be Narrower, if Correlation Increases, Corridor should be Narrower or Wider can’t recall… Sorry.

one of past exams, i think 2007 if correlation moves up, narrower corridor if volatility goes up, narrower corridor but they always ask you about the corridor of that particular whose correlation / volatility goes wherever… where did you get this, csk? thx

typo, I mean if correlation moves down, narrower corridor

Corridor widths are the opposite of Volatility and Something Else (what is it? Correlation?) everything else Corridor Widths move in the same direction.

transaction costs up - wider corridor (not to trigger higher costs) higher risk tolerance - wider corridor (I don´t care) higher correlation - higher corridor (they move together, I don´t care) higher volatility - lower corridor (cut possibility of deviating a lot) other volatilities - same as previous but these are my notes, I don´t have here the cfa or schweser texts

BUT if they move together dont they need a Narrower corridor?? B/c since they move together they can have a narrower corridor?

I think you narrow the corridor when the risk of deviating from desired allocations is higher. If they move together, that is less likely to happen, so you don´t need to narrow the corridors (perhaps the problem is the wording, as would be better to say “corridors should not be lower” and not “corridors should be wider”)

if they move together - less chance of diviating from alloaction. This still doesnt answer my question :slight_smile:

and you didn´t tell us where you got it from :slight_smile: but after these posts, I would agree with you for the second one, perhaps the best is not to touch z´s corridor

  1. if they asset correlations move up you can have a wider corridor because the assets are less likely to move out of their strategic allocations (i.e. 60% equity 40% debt). if they are correlated 1:1 (ya right!) then you should have a wide band to maintain SAA… if correlations decreases to 0 then you would have a narrower bands as one asset could move while the other doesn’t creating an imbalance in the target SAA. as for 1) increased volatility leads to narrorow bands. including increased volatility of other assets in the portfolio as it can throw off the entires portfolio weights.

hala_madrid Wrote: ------------------------------------------------------- > and you didn´t tell us where you got it from :slight_smile: > > but after these posts, I would agree with you for > the second one, perhaps the best is not to touch > z´s corridor it is from ‘CSK Tricky CFA questions, second edition’ I come up with these questions myself :slight_smile:

but he is talking about correlation between x and y… and asking about corridor for z…

z is not mutually exclusivein the portfolio. Z is still correlated to X & Y in some form so if Y’s correlation decreases, then the bands will narrow.

unless z is negativelly correlated to X & Y, in this case, the corridor gets wider. However, since we don’t know what is the correlation between the assets, we can’t conclusivelly say if for (2) it gets wider or narrower for (1) corridor gets narrower

why are ppl making up questions ? … the ones we have cfai, schweser, stalla, question banks, mocks, samples and past papers aren’t enough for you ???