CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction
An investor has a policy portfolio of 60% equities and 40% bonds. Rather than rebalancing monthly, the investor rebalances only when equity weight drifts beyond 55%-65%. Compared with monthly rebalancing, this approach most likely results in:
Rebalancing only when weights breach a corridor most likely lowers transaction costs because trades happen less often, but it allows the portfolio to drift away from the target weights, so risk can differ from the policy level until a boundary is reached.
- Alower transaction costs but greater tracking of drift from target riskCorrect
- Bhigher transaction costs and tighter control of risk
- Cidentical costs and risk because the target weights are the same
Explanation
Range (corridor) rebalancing trades less often, so transaction costs are lower, but the portfolio is allowed to drift from target weights, so risk can deviate from the policy level until a boundary is hit. Monthly rebalancing does the opposite.
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