CFA Level I Exam · Portfolio Management: An Overview

Portfolio Rebalancing, Monitoring and Performance Feedback

Updated 7 October 2026 · Fact-checked

Monitoring, rebalancing and feedback is the last step of the portfolio management process. You track the investor's needs and market conditions, trade back to the target allocation when weights drift or the IPS changes, and compare results with a benchmark. Weigh trading costs and taxes against the cost of drift.

Understand Rebalancing, Monitoring and Performance Feedback

The portfolio management process has three steps: planning, execution and feedback. Feedback is the third step. It starts after the portfolio is built and never really stops.

There are two things to monitor. The first is the investor: changes in wealth, income, time horizon, liquidity needs, risk tolerance, tax status or legal rules. These can change the investment policy statement (IPS). The second is the economy and markets: asset prices, interest rates and expected returns. These can change the portfolio's weights, or change the views behind the strategic allocation.

Rebalancing means trading the portfolio back toward its target weights. Prices move at different rates, so the actual mix drifts away from the target. Rebalancing restores the intended risk level. It usually means selling assets that have risen and buying assets that have fallen. It also costs money: commissions, bid-ask spreads, market impact and possible taxes. So you do not rebalance on every small move.

Performance evaluation is the other half of feedback. You measure returns and compare them with a valid benchmark, and you review whether the result came from the strategy or from the manager's decisions. The findings can feed back into the IPS, the asset allocation or the manager selection. A portfolio can also be rebalanced because the IPS changed, not just because prices moved.

The exam tests the logic: why rebalance, what triggers it, what it costs, and what the feedback loop is for.

Key formulas to remember

Current weight of an asset: Weight = Market value of asset ÷ Total portfolio market value; Compute after prices move. Compare with the target weight to find the drift.
Drift from target: Drift = Current weight − Target weight; Positive drift means overweight, so sell. Negative drift means underweight, so buy.
Trade amount to rebalance: Trade = (Target weight × Total portfolio value) − Current market value of asset; Positive means buy, negative means sell. Trades across all assets sum to zero if there is no cash flow in or out.
Active return: Active return = Portfolio return − Benchmark return; The basic feedback measure of manager performance against the benchmark.
Rebalancing trigger types: Calendar | Percentage-of-portfolio (corridor) | Combination; Calendar rebalances at fixed dates. A corridor rebalances when a weight leaves its allowed range. A combination checks on dates and trades only if a corridor is breached.

How to solve Rebalancing, Monitoring and Performance Feedback questions

Use this order for any question on monitoring, rebalancing or feedback.

1Identify what changed: the investor's circumstances, the market, or the portfolio weights.
2If the investor changed, ask whether the IPS must be updated before any trading.
3If prices changed, compute current weights and compare them with the targets.
4For a numerical question, compute each trade as target value minus current value. Check that buys and sells offset.
5Weigh the benefits of restoring risk against transaction costs and taxes, and check any rebalancing rule given (calendar or corridor).
6For performance, find the portfolio return and the benchmark return, and subtract to get the active return.
7Choose the option that fits the process: the feedback result feeds back into planning, not just reporting.

Quickest way: Weights, drift, trade

When to use it: Use for numerical rebalancing questions with three options listed smallest to largest.

Total the portfolio value after the price changes.
Multiply total by the target weight to get the target value for the asset.
Subtract the current value. The sign tells you buy or sell.
Eliminate options with the wrong sign first. Then check the size.
For conceptual items, drop options that say rebalancing is free, always required or only for taxes.

Common mistakes in Rebalancing, Monitoring and Performance Feedback

Using the original purchase amounts as current values.
The question gives starting values and then returns, and students skip updating.
Fix: Grow each asset by its return first. Compute the new total before computing weights.
Buying the asset that went up.
Momentum feels natural. Students confuse rebalancing with chasing winners.
Fix: Rebalancing to fixed targets sells assets that are overweight and buys those that are underweight.
Rebalancing against the old total instead of the new total.
Students apply target weights to the starting value.
Fix: Apply targets to the current total portfolio value.
Ignoring costs and taxes.
Students treat rebalancing as always beneficial.
Fix: Remember it restores risk but has costs. Wider corridors mean fewer trades and more drift.
Thinking feedback only means measuring returns.
Performance numbers are the visible part.
Fix: Feedback also covers monitoring the investor and the market, and feeds changes back into the IPS and allocation.

Worked examples

Example 1

A portfolio is worth €1,000,000 with target weights of 60% equities and 40% bonds. After a market move, equities are worth €720,000 and bonds are worth €380,000. To rebalance to target, what should the investor do with equities?

Show the solution

Total value = 720,000 + 380,000 = €1,100,000.
Target equity value = 60% × 1,100,000 = €660,000.
Trade = 660,000 − 720,000 = −€60,000.
The negative sign means sell. Check: bonds target = 40% × 1,100,000 = €440,000, so buy €60,000 of bonds. The trades offset.

Answer: Sell €60,000 of equities and buy €60,000 of bonds.

Example 2

A portfolio returned 8.4% in a year. Its benchmark returned 7.1%. What is the active return? A) -1.3%, B) 1.3%, C) 15.5%.

Show the solution

Active return = portfolio return − benchmark return.
Active return = 8.4% − 7.1% = +1.3%.
Option A is -1.3%. It reverses the subtraction, so it has the wrong sign.
Option C is 15.5%. It adds the two returns, which is not how active return is measured.
A positive active return means the portfolio outperformed the benchmark. One year of outperformance does not alone prove skill.

Answer: B. The active return is +1.3%, so the portfolio outperformed the benchmark.

Exam tips

Know that monitoring, rebalancing and feedback is the third step after planning and execution, and that it feeds back into planning.
For numerical items, always update values with returns before computing weights, and use the new total.
Remember the rebalancing trade-off: restores intended risk but incurs transaction costs and possible taxes.
Watch for questions where the investor's situation changed. The correct answer often involves revisiting the IPS first.
Benchmark questions: the benchmark must fit the mandate. A mismatched benchmark makes active return misleading.

Practice questions from Portfolio Management: An Overview

Rebalancing, Monitoring and Performance Feedback in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Rebalancing, Monitoring and Performance Feedback: frequently asked questions

What is rebalancing in portfolio management?

Rebalancing is trading a portfolio back toward its target asset allocation after market moves have changed the weights. It usually means selling assets that have become overweight and buying those that are underweight. Its aim is to keep risk in line with the IPS.

How often should a portfolio be rebalanced?

There is no single correct frequency. Common approaches are calendar rebalancing, corridor rebalancing when a weight breaches a set range, or a combination. More frequent rebalancing keeps weights close to target but raises costs.

What is monitoring in the portfolio management process?

Monitoring means tracking changes in the investor's circumstances and in market and economic conditions. Either can mean the IPS or the allocation needs updating. It is part of the feedback step.

Why compare performance with a benchmark?

A benchmark gives a fair standard that matches the portfolio's mandate. The difference between portfolio and benchmark return, the active return, helps show whether the manager added value. The result feeds back into future decisions.