CFA Level I · CFA Level I Exam · Portfolio Management: An Overview
A portfolio is rebalanced to a fixed 50/50 equity/bond mix. Compared with a buy-and-hold approach, a constant-mix rebalancing strategy is most likely to perform relatively better in:
Constant-mix rebalancing most likely performs relatively better in flat or range-bound markets with reversals. Because it sells after rises and buys after falls, it profits from mean reversion, while in strongly trending markets it tends to lag a buy-and-hold approach.
- Amarkets that trend strongly in one direction
- Bmarkets that are flat or range-bound with reversalsCorrect
- Cmarkets in which equities rise steadily for several years
Explanation
Constant-mix rebalancing sells assets after they rise and buys after they fall, which is a contrarian approach that benefits when prices reverse. In strongly trending markets it keeps selling the winner and tends to lag buy-and-hold.
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