volkovv Wrote: ------------------------------------------------------- > 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 will corridor gets narrower for (1)?
comp_sci_kid Wrote: ------------------------------------------------------- > volkovv Wrote: > -------------------------------------------------- > ----- > > 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 will corridor gets narrower for (1)? strikershank explained it well why it gets norrower for (1) just to reiterate, if volatility of a different asset, Y in your example increases, it will affect portfolio weights using the extremes example that you talked about few days ago, lets say portfolio is $100, and there are two assets A and B with $50 each, now say B has an abnormal volatility, so it drops from $50 to $10, now combined portfolio is $60 and weight of A is 50/60 = 83.3%, to avoid the weight of A getting to far out of line from original 50%, you impose narrower corridor and rebalance frequently when other asset(s) are volatile.
volkovv, that i perfectly understand, the key question is when you rebalance B, wouldnt you rebalance A automatically>?
well in your simple example since you only have 2 assets, whenever you rebalance B you have to rebalance A, however when you have more than 2 assets, in order to get money to buy more of B, you have to sell some other asset. How do you determine, which one to sell, you do it based on its corridor, so the asset(s) that was(were) closer to its border before B got out of line, would be the first candidate(s) for rebalancing, since you know that B is volatile, you set narrower corridors on all other assets, to be able to pick candidates for rebalancing when B gets out of line