Rebalancing recap questions: likely, equity, market

b_sea93

Let’s see who can get these:
1. Valuators trade as follows:
A. As contrarians
B. As momentum players
C. Both
2. In a deteriorating equity market who is most likely to allocate more equity to their portfolio?
A. Holder
B. Rebalancer
C. Shifter

OmarAdnan

1. C
2. B

Houjichasan

Doh…typo…..
My 1 should be C

Chuckrox8

C, B correct.
Holders leave their positions unchanged. In a fluctuating market they have little impact on the market.
Rebalancers like to keep their positions in original weights. In a fluctuating market they have a smoothing effect.
Valuators can play as both contrarians and momentum players (taking positions based on their perception of value…. ‘is it now cheap therefore I buy OR is it cheap and going to get cheaper so I sell’. Careful on this one. They play in 2 categories. The ‘reversionists’ (contrarians) will smooth the fluctuating market while the momentum players exacerbate the fluctuations.
Shifters don’t act according to market valuations- instead they shift to different allocations because their circumstances change (lose a job and hence change your equities to cash). The effect on markets is so clear but the CFAI book says it exacerbates market fluctuations….. since shifting generally occurs in more adverse situations (booms/busts).