Buy and Hold strategy in rebalancing Question

investment, confusion, following

sorry if this has been asked before.
My confusion is on schweser notes book 5, page 50
the slope 0.6 indicates that 60% of total assets are originally invested in stock.
assuming initial investment of 10 dollars, 4 dollars in bills and 6 dollars in stock. stock price increases from 6 to 8 dollars. shouldn’t the total assets increase from 10 dollars to 12 dollars? I am not quite following what the slope 0.6 in that graph mean. Please help, thanks!

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NakedPuts00

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发表于 2013-4-3 20:52 | 只看该作者

All it means that when they started , the allocation to the equities are 60% and bonds are 40%.
In your example, total assets are increased from 10 to 12. As time passes, 60% allocation will go from 60 to more or less depending on the market direction.

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bkballa

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发表于 2013-4-3 20:54 | 只看该作者

slope is (chg in value of assets / chg in value of stock mkt). So since 60% is in stocks, when market goes up by 20%, value of assets will incr by 12% (i.e. 60% of 20%).
I think the payoff diagram is just a ‘snapshot’ for a pt in time, so once the market shifts, since it’s a buy and hold strategy, your allocations will change and the ‘slope’ of your portfolio will be different.

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Buy and Hold strategy in rebalancing Question

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